Adverse Impact of Irregular Credit Card Payments

Many credit card users fail to repay their dues on time. This could be attributed to sheer negligence, lack of awareness about the fee structure, spending beyond the repayment capacity, job loss or unforeseen financial emergencies. Such repayment failures can adversely impact one’s financial health, both in the short and long terms. Repeated failures can even land credit card holders into a deep debt trap.  

Some of the major pitfalls of not paying off the outstanding credit card amount bill by its due date include:

Attracts finance charges and late payment fee: 

Card issuers levy finance charges of 23-49 per cent p.a. on the unpaid proportion of the bill. In addition to this, they also charge late payment fee if the card holder fails to repay the minimum amount due. This fee can go up to Rs 1,300 per billing cycle depending on the bill amount. 

Those who cannot repay their entire credit card bill on time should convert the unpayable component into EMIs. The interest rate of such conversions is much lower than the finance charges levied on the unpaid credit card bill. The tenure can go up to 5 years, depending on the card issuer. EMI conversions allow card holders to repay the unpaid component in smaller tranches as per their repayment capacity. 

Card holders who cannot avail EMI option on their credit card or are charged higher interest rate can opt for credit card balance transfer. This option allows the user to transfer existing credit card balance to another card issuer at lower or zero interest rate. However, such interest rate concessions are offered only for a pre-determined period, usually up to three months. Failing to repay the transferred balance within the stipulated period would attract the usual finance charges levied by the card issuer.

Card users can also avail personal loans to repay large outstanding credit card dues. Lenders usually charge lower interest rate on personal loans than what they charge for credit card EMI conversions. Those who cannot avail personal loans can consider secured loan options like gold loans, loan against securities or top-up home loans (in case of existing home loan borrowers) to repay their outstanding credit card dues.  

Revokes interest-free period on fresh credit card transactions:

Interest-free period refers to the duration between the date of making your credit card transaction and the due date for its payment. This period generally ranges between 18-55 days. Card transactions carried out during this period do not attract interest cost in the form of finance charges, as long as the dues are repaid by the due date. However, this interest free period is revoked on fresh credit card transactions once you fail to repay the entire bill by the due date. The interest free period does not get restored until the repayment of the entire outstanding bill.  

Adversely impact credit score:

Your credit score is a three-digit numerical representation of your creditworthiness. It is one of the first filters factored in by the lenders to evaluate your credit card or loan application. As your credit score calculation is based on your credit card and loan related activities mentioned in your credit report, irregular repayment of credit card bill will harm your credit score. As the non-payment of the credit card bill reflects in your credit card bill for a long time, it can reduce the possibility of securing loan and credit card in the future.

Can lead to the withdrawal of pre-approved offers: 

Lenders as well as online financial marketplaces offer pre-approved loans and credit cards based on your credit score and other aspects of your credit profile. Such pre-approved offers usually come with better product features, faster processing and even lower interest costs or other fees. These offers can also give you a fair idea of your loan and credit card eligibility and can even help in negotiating with other lenders for better loan deals. As lenders consider non-repayment of credit card bills as a sign of higher credit risk, they can stop offering you pre-approved credit card and loan offers on delayed or non-repayment of credit card bills.

The author is Senior Director, Paisabazaar.com   

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

Adverse Impact of Irregular Credit Card Payments