Credit card holders may face higher interest rates. On December 20, the Supreme Court (SC) overturned a 2008 ruling by the National Consumer Disputes Redressal Commission (NCDRC) to cap annual credit card interest rates at 30 percent.
Credit cards offer an interest-free period when there is no interest on spending. However, interest is charged on the outstanding balance once the interest-free period is over. With the cap being removed interest rates on credit cards can be as high as 45 per cent. A credit card debt is unsecured and so the risk of default is high, so by keeping interest rates higher banks can recover the cost.
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Credit card interest accumulates over time through compounding, where interest is calculated on the outstanding balance, including previously charged interest. If interest is compounded daily, each day’s interest is added to the principal, increasing the balance for future interest calculations.
Over time, this leads to exponential growth in the amount owed. For example, with a 45 per cent annual interest rate, your balance would grow daily as interest is compounded, causing a small debt to snowball quickly. Regular payments can reduce the balance and limit interest charges, but delays increase costs.
What To Keep In Mind
This makes it imperative that you pay your credit card dues full on or before the due date. Paying the minimum amount due will mean that you do not have to pay the late fees, but the interest compounds as usual. Unpaid credit card debt will severely affect your credit score, making it difficult to get loans or credit cards in the future.
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Sometimes in case you have a large credit card outstanding, your bank will give you the option of converting it into EMIs. While that will save you from very high interest rates, you still have to pay interest rates of up to 15 per cent or more as interest. Plus it would mean that you have to pay an additional amount as EMI for the entire tenure.
So, it is important to be very careful regarding your credit card spending, ideally, one should not spend an amount on a credit card, if one does not have that amount of disposable cash in their savings account. Unpaid credit card debt can spiral out of control and put one in a debt trap.
