Do you understand your credit card bills

Part I: How to read your credit card bills

Now that you know about billing cycles and billing dates, payment due date, minimum amount due, total amount due and previous balance, let us look at what else you will find on your credit card statement.

Once you understand them, you will be able to spend and use your credit card judiciously.

Purchases made

This will list the purchases made by you on your card during one billing cycle. It comes with the date on which the purchase was made.

This enables the cardholder to verify the purchases s/he made if s/he keeps the bill with her/ him.

Late payment fee

This is the penalty you will have to pay if you don't pay your bill by the due date. If your due date is January 20, 2007, and if the payment does not reach your credit card issuer before this date, then a late payment fee of 30 per cent of your minimum amount due is levied on your card.

However, this is a general figure; different card issuers charge different late payment fees.

Interest charge

This is what the card issuer charges you for using their credit card and not making the payment on time.Interest is charged only if you fail to make total payment on your account before the due date or pay only part of the amount due.

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For example, if your bill shows you have made purchases worth Rs 4,000, but you find that you can pay Rs 2,000, then interest will be charged on the balance Rs 2,000.

Until you clear all your outstanding dues, any purchase you make using your credit card will be added to your loan amount and you will be charged interest on it.

This is a monthly interest charge of three per cent on your balance outstanding. This works out to 36 per cent per year, making the credit card one of the costliest modes of borrowing money.

Service Tax

This is the tax the company levies for offering you their services; it goes to the government. This is approximately 12.24 per cent on your interest amount. There are murmurs that this will soon be increased to 12.36 per cent.

If your interest amount is Rs 100, then you will have to pay a service tax of Rs 12.24 (12.24 per cent * Rs 100).

Cash advance limit

Every card issuer allows a cash withdrawal facility on credit cards. This is generally a fixed percentage of your total credit limit.

This facility allows you to use your credit card just like your bank's ATM.

However, once your cash advance limit is fixed, you can withdraw only upto that amount. If your cash advance limit is Rs 5,000 then you can't withdraw an amount more than this.  

One important thing to note is cash withdrawn using this facility does not enjoy a credit-free period. That is, interest is charged on this amount from the day of withdrawal.

For example, if you withdraw cash of Rs 5,000 on March 12 and your billing date is March 30 then interest will be charged for 18 days. Let us assume that your card issuer charges you an interest of 2.5 per cent on this facility. In that case, the interest charged charged will be Rs 75 (Rs 5,000 x 2.5 per cent x 18/30).

Credit limit

This is the maximum amount for which you can make purchases on your credit card. If you have a credit limit of Rs 10,000 (including the cash advance limit) per billing cycle, then you cannot use your card to buy goods more than this amount.

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If at all you try doing it, the transaction is not validated. When the merchant swipes your credit card, it sends the data stored in the magnetic tape of your credit card to the credit financers (Visa or Master) servers to check for your credit limit.

Your card issuer enhances the credit limit if you make regular payments on your card account. However, this is discretionary and differs from one card issuer to another.

Available credit limit

This is the credit amount you can avail of after making purchases.

Let us assume your credit limit is Rs 10,000. On March 31 you made a purchase of Rs 4,000. On that day your total credit limit will decrease by Rs 4,000. This means that, as on March 31, your credit limit drops to Rs 6,000.

Now on April 1 if you were to buy a purchase worth Rs 7,000, your transaction will not go through. This is because your available credit limit is now Rs 6,000.

Remember that at no point in time will you be able to buy good/s more than your total or available credit limit. This is how the credit card company maintians a check on the amount you can spend using a credit card.

However, if you make a payment of Rs 3,000 on the total due amount of Rs 4,000 on your March bill, then this payment made gets added to the available credit limit for the month of April. This amount will reflect in your April bill as 'payment made'.

Here's an example that should make it clearer:

Available credit limit in February = (Total credit limit - total amount due in January) + payment made in January.

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In the above case, available credit limit in February will be equal to (Rs 10,000 - Rs 4,000) + Rs 3,000, which is equal to Rs 9,000. 

Identify your card financer

In case if you are curious and want to know who finances your credit card spending every month, look at the first digit of your 16-digit credit card account number.

A card account number beginning with '4' is a Visa card and the one beginning with '5' is a Master card.

Remember, your card issuer and card financer are two different entities.

For example, if you have a bank account with ICICI Bank and it issues a credit card to you, then the bank is the card issuer.

If this credit card begins with the digit '4' then Visa finances your monthly purchases; if it begins with '5' then Master Card is the financer.

Part I: How to read your credit card bills