A credit card eliminates the need for you to carry cash everywhere and offers several benefits over other modes of payments. It also allows a cardholder to purchase goods and services on credit and pay it back over time. However, missing even a single EMI can land you in a huge trouble. Although bank representatives won’t show up at your door demanding immediate payment, they will definitely impose several charges on you. It will also have a negative impact on your credit score.
Consequences of delaying your credit card dues
The effects of late payment may stay on your credit report for several months which makes it important to understand why you should always pay your credit card dues on time.
- You will have to pay the late fee: When you fail to pay the minimum amount due on or before the due date of payment, the bank will charge a late fee from you which will be shown in the next month’s credit card statement. The amount of late fee will vary according to the amount of outstanding balance and usually goes up to a maximum of Rs. 1,000.
- Interest payout will increase substantially: Apart from late fees, you will have to pay interest on the outstanding amount after the due date has passed. Credit card interest is charged on a daily basis for as long as you do not clear all your dues. Let us understand this through an example.
Mr. Ram’s credit card statement is generated on 15th of every month. Let us consider his purchases between 15th May 2018 to 15th June 2018. The annual percentage rate or APR on his credit card is 40% per annum.
Retail Shopping: Rs. 8,000 on 28th May 2018.
Online Shopping: Rs. 10,000 on 17th May 2018.
Cash withdrawal: Rs. 5,000 on 1st June 2018
If no previous balance is carried forward by Mr. Ram, interest will be charged only on the cash withdrawal for 14 days which is equal to Rs. 77.94. The total amount due in his next statement will be Rs. 23,077.94. Cash withdrawals are not eligible for a grace period and attract interest charges from the first day.
However, if he carries a previous balance, say Rs. 3,000, in this case, the interest-free period is not applicable. So, the total interest payout will be:
On Rs. 10,000 for 28 days @ 3.34% per month = Rs. 311.74
On Rs. 8,000 for 17 days @ 3.34% per month = Rs. 151.41
On Rs. 5,000 for 14 days @ 3.34% per month = Rs. 77.94
- Late payment is reported to credit bureaus: Banks report your EMI payments to credit bureaus such as CIBIL, Experian or Equifax so that they can prepare your credit report and assign a credit score to you. Payment history makes 30-35% of your credit score so even if you miss a single payment, your credit score will reduce. A lower credit score can make it difficult for you to get new loans in future at affordable interest rates.
Additional Reading: Make your Credit card Your Ally
Apart from the above-mentioned charges, you may also lose out on the preferential rates of interest, extra reward earnings and promotional discounts on certain brands. Hence, make sure to clear your credit card dues on time so that you can keep enjoying the benefits on the card along with a good credit score.