Lifetime-Free Credit Cards: What's The Hidden Cost?

Lifetime-free credit cards are highly promoted as a cheap source of credit with neither annual nor joining fees. Although they don't charge overt fees outright, they don't come for free either. Banks and financial institutions keep their revenues intact by charging elevated rates of interest, transaction fees, forex markups, and fees, so customers must be wary of the hidden costs.

A lifetime-free credit card means no annual maintenance charges, compared to other normal credit cards, which charge between Rs 500 to Rs 10,000 annually. Banks still make money in the form of revolving credit interest, late payment fees, and other charges on various transactions.

High Interest Rates on Unpaid Balances

Credit card interest rates in India typically range between 36 per cent and 52 per cent per year. If a cardholder is carrying a carry-forward, interest cost can negate any advantage of not paying a yearly fee. There are additional charges for delayed payment, hence, cardholders should pay dues in full each month.

Hidden Transaction Fees

While there is an interest-free period of 50 days for purchases, cash withdrawals at ATMs using a credit card incur a transaction fee of 2.5 per cent to 3.5 per cent of the amount, along with instant accrual of interest. Similarly, foreign transactions incur forex markup fees of 3 per cent to 3.5 per cent, thus increasing the cost of shopping abroad.

Delayed payments incur penalties ranging from Rs 100 to Rs 1,300, depending on the sum due, and also trigger interest charges against the entire unpaid amount. On top of that, an 18 per cent Goods and Services Tax (GST) is charged on various financial charges, increasing the expenses.

Reward Points and Cashback Limitations

While most lifetime-free credit cards provide reward points and cashback rewards, these frequently come with stipulations. They may impose a spending cap on rewards, or they may limit cashback to specific products like groceries or gas. Additionally, customers may not always be able to use reward points before they expire because they may have an expiration date.

Impact On Credit Score

Abuse of a lifetime-free credit card also affects the credit rating of an individual. Excessive use of credit, i.e., greater than 30 per cent of the credit limit, lowers creditworthiness. Non-payment is also communicated to the credit bureaus, lowering future eligibility for a loan. Some banks also reduce the credit limit of a user if the card remains idle for a very long period.

Banks also use lifetime-free credit cards as a tool to promote other financial products. Cardholders will be given special deals through phone calls and e-mails for personal loans, insurance bundles, and premium credit card upgrades, which will have higher fees.

How To Use A Lifetime-Free Credit Card Wisely

Despite these hidden charges, lifetime-free credit cards can be beneficial if used correctly. Paying the whole bill on time, avoiding cash advances, and monitoring reward programs can utilise rewards while mitigating expenses. Carefully reading the terms and conditions prior to signing up avoids any unexpected monetary shocks.

"Lifetime-free credit cards are beneficial in their clarity by excluding annual fees, making credit more accessible to a wider consumer segment. But lack of fees may decrease prudence, and thereby some consumers can get trapped in a revolving cycle of credit or a debt trap. It is imperative that consumers have disciplined financial practices and remain cautious to maximise the benefits of such cards without landing in unintended financial burdens", says Rajesh Londhe, co-founder and head of payments, Phi Commerce.

Ultimately, lifetime-free credit cards are never actually free. They can be a smart financial move for those who manage their use and payments carefully but can become a costly affair for consumers who carry revolving balances or who frequently incur additional fees.

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