Why availing revolving credit is not a good idea

Revolving credit on credit card is a tempting proposition offered by all banks to all credit cardholders, but this temptation comes with a heavy price. But before we getting judgemental about revolving credit, let us first try to understand what is revolving credit and how it works.

Simply put, revolving credit is basically credit available to a cardholder in the form of outstanding amount after due date of the credit card bill. The minimum amount payable on credit card bill is 5% of the total amount. Assuming that there is no outstanding amount on previous credit card bill other than the last bill, the amount remaining outstanding on the last bill plus the amount spent through credit card on fresh purchases made thereafter is considered as credit and the interest is charged accordingly.

Here’s an example that will help you to understand how revolving credit works (this example has been suitably adapted from the example given by a leading private bank to explain revolving credit). Amar has a credit card of ‘X’ bank and has paid all previous dues up to August 2017 on his credit card. The statement date of his credit card bill is 18th of every month and the due date is 8th of next month. Amar buys household goods worth Rs 15,000 on September 10, 2017, and buys groceries and other items worth Rs. 5,000 on September 15, 2017. The bank’s statement dated September 18, 2017 shows total dues of Rs. 20,000 and minimum amount due of Rs. 1,000 and mentions payment due date as October 8, 2017. Amar faced temporary cash crunch in the first week of October and could neither pay the total dues of Rs 20,000 nor the minimum amount due of Rs. 1,000 by the due date (October 8). However, Amar paid Rs 2,000 on October 15. Thereafter, he made fresh purchases of groceries worth Rs. 1,000 on October 16. On October 17, he makes a payment of Rs 15,000 to the credit of his card.

The credit card statement dated October 18 will show the following components of the outstanding dues payable by Amar:
Interest on Rs 15,000 @3.40% p.m. from Sept. 19 to Oct. 11 (23 days) : Rs 385.64
Interest on Rs13,000 @3.40% p.m. from Oct. 12 to Oct. 14 (3 days) : Rs 43.59
Interest on Rs 5,000 @3.40% p.m. from Sept. 19 to Oct. 14 (26 days) : Rs 145.32
Interest on Rs 3,000 @3.40% p.m. from Oct. 15 to Oct. 18 (4 days) : Rs 13.41
Interest on Rs 1,000 @3.40% p.m. from Oct. 14 to Oct. 18 (5 days) : Rs 5.59
Total interest payable on outstanding amount: Rs 593.56
Late payment charges: Rs 500.00
Service tax and other levies: Rs 164.03
Principal amount outstanding as on October 18: Rs 4,000
Total dues for the billing statement of October 2017: Rs 5,257.60

From the above example, it is clear that the total cost of finance works out to Rs 1,257.60, which is quite high. The interest rate charged by the banks on credit card bills ranges from 1.99% p.m. (23.88% p.a.) to as high as 3.40% (40.80% p.a.). Adding up the late payment charges and service tax and other levies, the finance charges become quite exorbitant. Hence, availing the facility of revolving credit on credit card is not a good idea.

Why availing revolving credit is not a good idea
Revolving credit on credit card is a tempting proposition offered by all banks to all credit cardholders, but this temptation comes with a heavy price. But before we getting judgemental about revolving credit, let us first try to understand what is revolving credit and how it works.

Simply put, revolving credit is basically credit available to a cardholder in the form of outstanding amount after due date of the credit card bill. The minimum amount payable on credit card bill is 5% of the total amount. Assuming that there is no outstanding amount on previous credit card bill other than the last bill, the amount remaining outstanding on the last bill plus the amount spent through credit card on fresh purchases made thereafter is considered as credit and the interest is charged accordingly.

Here’s an example that will help you to understand how revolving credit works (this example has been suitably adapted from the example given by a leading private bank to explain revolving credit). Amar has a credit card of ‘X’ bank and has paid all previous dues up to August 2017 on his credit card. The statement date of his credit card bill is 18th of every month and the due date is 8th of next month. Amar buys household goods worth Rs 15,000 on September 10, 2017, and buys groceries and other items worth Rs 5,000 on September 15, 2017. The bank’s statement dated September 18, 2017 shows total dues of Rs 20,000 and minimum amount due of Rs 1,000 and mentions payment due date as October 8, 2017. Amar faced temporary cash crunch in the first week of October and could neither pay the total dues of Rs 20,000 nor the minimum amount due of Rs 1,000 by the due date (October 8). However, Amar paid Rs 2,000 on October 15. Thereafter, he made fresh purchases of groceries worth Rs 1,000 on October 16. On October 17, he makes a payment of Rs 15,000 to the credit of his card.

The credit card statement dated October 18 will show the following components of the outstanding dues payable by Amar:
Interest on Rs 15,000 @3.40% p.m. from Sept. 19 to Oct. 11 (23 days) : Rs 385.64
Interest on Rs13,000 @3.40% p.m. from Oct. 12 to Oct. 14 (3 days) : Rs 43.59
Interest on Rs 5,000 @3.40% p.m. from Sept. 19 to Oct. 14 (26 days) : Rs 145.32
Interest on Rs 3,000 @3.40% p.m. from Oct. 15 to Oct. 18 (4 days) : Rs 13.41
Interest on Rs 1,000 @3.40% p.m. from Oct. 14 to Oct. 18 (5 days) : Rs 5.59
Total interest payable on outstanding amount: Rs 593.56
Late payment charges: Rs 500.00
Service tax and other levies: Rs 164.03
Principal amount outstanding as on October 18: Rs 4,000
Total dues for the billing statement of October 2017: Rs 5,257.60

From the above example, it is clear that the total cost of finance works out to Rs 1,257.60, which is quite high. The interest rate charged by the banks on credit card bills ranges from 1.99% p.m. (23.88% p.a.) to as high as 3.40% (40.80% p.a.). Adding up the late payment charges and service tax and other levies, the finance charges become quite exorbitant. Hence, availing the facility of revolving credit on credit card is not a good idea.