How to calculate the true cost of using a credit card – A complete guide | Mint

Credit cards are an appealing tool for many due to the several benefits it offers. Credit card benefits include rewards points, cashback, air miles etc. Some users mostly get lured by these rewards and offers and opt for credit cards for most transactions without estimating the related costs. Check out the costs associated with a credit card.

Interest payments

If you do not pay your credit card bill fully on time, banks usually levy an interest rate on the due amount. This interest rate could be high in many cases, which is a percentage of the total due amount.

According to Rohan Bhargava, co-founder of CashKaro & EarnKaro, “Understanding the true cost of using a credit card goes beyond interest rates and includes annual fees, late payment charges, and foreign transaction fees.”

Credit card fees

Annual fees

Banks charge a yearly fee to maintain your credit card. This fee will differ from bank to bank, and some banks may not charge annual fees at all. It also depends on the type of credit card and the benefits it provides. Premium credit cards with many benefits levy a higher annual fee compared to regular credit cards.

Cash withdrawal fees

If you use your credit card to withdraw money, the banks charge fees for such transactions. The fees may go up to 2.5 per cent of the total amount. Therefore, it is advised to avoid using credit cards to withdraw money through credit cards.

Late payment fees

When you miss a credit card payment, banks charge late payment fees. However, if you pay the minimum due amount, no late fees will be charged. Failing to do so will result in late payment fees.

GST

GST or the goods and services tax is charged on several credit card fees such as annual fees, processing fee on EMIs and interest. GST will be charged according to the current prevailing rate in the country, which is 18%.

Foreign transaction fee

Banks charge foreign transaction fees if you use your credit card for payments outside the country. This fee may range from 1.5% to 3% or more, according to Bankbazaar. Please note that the foreign transaction fee will differ from bank to bank.

Additionally, credit card users must also thoroughly understand the costs included in no-cost EMI options as well.

“No-cost EMI options may appear expense-free but often include hidden costs like processing fees and GST, raising the total cost by up to 18%,” Bhargava said.

“Similarly, for individuals and HUFs with long-term capital gains from selling property acquired before July 23, 2024, taxes can be minimized by choosing between 20% on indexed gains or 12.5% on unindexed gains. In cases where indexation results in long-term capital loss, no tax liability arises” he added.

How to manage credit card costs?

According to Bhargava, “To manage credit card costs, consider your repayment behaviour. Paying only the minimum due lets interest accumulate, inflating your expenses. Weigh rewards or cashback benefits against fees and interest, read the fine print, and pay balances in full. Financial discipline and informed decisions are essential for leveraging credit card benefits while minimizing financial burdens.”

In conclusion, you can make the most out of credit cards by paying the full bill on time. This will reduce the cost of a credit card. Additionally, opt for cards with no or minimal fees to save some money and enjoy all the benefits of a credit card.

(Note: Using a credit card carries its own set of risks)