Charges on credit card are very high and more often than not have the tendency to spiral out of control if not payed off quickly.
Default on credit card payment attracts multiple charges, the combined effect of which can be as high as 4-5% of the outstanding amount. On an annual basis that’s 50-60% interest. Obviously you can see its huge.
Normally banks have 3 types of charges on outstanding amount.
1) Interest on outstanding amount 2) Penalty of not paying on time 3) Other misc. charges
Generally, people think than it is only the interest that they have to pay, but a careful study of the credit card bill reveals that a lot of other charges are also charged. The most important of them is the penalty. It ranges anywhere from 700-2000 rupees depending on the bank. It is normally a fixed amount and is charged in full irrespective of the fact whether you made partial payment or no payment at all. Thus if your outstanding amount is less, this results in a big percentage being paid as charge.
In addition to the interest and penalty sometimes a host of other charges can also be seen under various names, eg finance charges, EMI charges etc.
All these are of course not including the statutory service charges paid to the government.
Thus the best course of action is never to default on your credit cards. In case you feel there may be a shortfall in some month, it is advised that you borrow the money from friends or family rather than keep any amount outstanding.
Lastly a serious word of caution regarding the minimum payment due amount. Most banks show 2 amounts in your credit card bill. One is the total amount outstanding, and the other is the minimum amount to be paid. The general perception is that if you pay the minimum amount, you are not charged fine. This is completely wrong. When you are making payment of only the minimum amount, then obviously you are not making the full payment and all the charges discussed above will be levied on you. The only benefit is that the bank does not report your default to CIBIL, thus saving you from adverse credit rating. In fact, as per calculations, if you only pay the minimum amount, it takes more than 36 months to pay off your entire outstanding. Thus do not fall in that trap.