Credit Card is a useful facility if used wisely by Individuals. However it becomes an evil in case one does not stick to the basic rules about the usage and payment. Most of the people who use the credit card have little knowledge about the billing cycles and the payment schedules. A lot of hard sell is done by banks in order to provide the card but no knowledge is imparted along with it. The brochures are too verbose and always miss the basic point. Not many people go through the terms and conditions because they never anticipate that anything wrong would happen to them.

There is a need to understand the billing cycle in order to make the best use of your card. The credit period of around 50 days needs to be realized in real in order to make the best use of the card. Imagine Mr. Verma is offered a card by ICICI Bank and with credit limit of Rs. 40000. The maximum credit period is 50 days and he was offered 70% as cash limit (please note that this post focuses on usage done through credit limit only and not cash limit. The credit limit is used when you purchase anything by swiping the card at merchant location. Cash Limit is used when you go to ATM and use the card to withdraw money). The billing cycle included two important dates

1) Billing Date- this is the date when the bill would be generated for the card. This date is fixed and in Mr. Verma Case it is 20th of every month.
2) Payment date- This is the final date for the payment of dues for the bill generated in the previous month. This date for Mr. Verma is 10th of every month.

Mr. Verma started using it February 2008 and spent only Rs. 1000 on it. On 20th March 2008 the Bill was generated and he was asked to pay Rs. 1000 in full or minimum due of 5% i.e. Rs. 50 before April 10th 2008.

On March 21st 2008 Mr. Verma was clear. If he bought anything on March 21st or on 21st of every month than the maximum credit period would be 50 days. This would be because for anything which would be purchased on 21st the bill would be generated on 20th of next month and the payment date would be 10th of following month. In Mr. Verma case for anything purchased on March 21st the billing date would be April 21st and payment date would be 10th of May 2008.

However there is an important catch here. The 50 day credit limit is valid only if on earlier bill the complete amount is paid in full. In Mr. Verma case for anything purchased by him between March 21st and April 20th would be charged with zero interest only if on April 10th he makes full payment of Rs. 1000. To make it simpler let’s consider both scenarios.

Scenario 1- Full Payment of dues- On March 21st Mr Verma purchased furniture for Rs. 4000. Also on 5th of April he made full payment of Rs. 1000 due on his earlier bill (Bill generated on March 2oth). Hence the statement generated on April 20th 2008 would be a Bill of Rs. 4000 with no interest. The payment date of this bill be May10th 2008.

Scenario 2- Only partial payment of previous dues is made- Mr. Verma purchased furniture of Rs 4000 on March 21st 2008. However on 5th April he paid only minimum due of 5% i.e. Rs. 50 to the bank (Anything below full amount is considered partial payment). The statement generated on 20th April 2008 would be the bill of Rs. 4950 with interest of 3% and a service charge on top of it. Hence Mr. Verma was asked to Pay an additional interest and service charges amounting approx Rs. 163 along with Rs. 4950 on May 10th 2008. Important point to note here is that interest is charged not only on Rs. 950 which was not paid but also on Rs. 4000. Just because full amount was not paid Mr. Verma has to pay Interest on Rs. 4000 also which he could have enjoyed interest free had previous dues was paid in full. Anything purchased from March 21st to April 20th would now be charged with an interest rate. This is important mechanism used by credit cards to earn their income.

The minimum amount due is a trap and main reason why most people are in credit card debt. They pay the minimum amount due and continue with other expenditure only to realize that they end up paying only interest to bank and minimal principal. If Mr. Verma utilizes the complete credit limit of Rs. 40000 then the minimum amount due each would be Rs. 2000. If he pays Rs. 2000 every month than approx Rs 1400 would go as interest charges and only Rs 600 as principal. This is a pathetic situation because not only the principal would not look huge but interest would eat into most of your payments.

I have learned this hard way but now I use the billing cycles very effectively. You need to get out of this trap to find the maximum benefit of Credit Cards. The charm of keeping cards is there and I would highlight the same in my subsequent posts till that time browse through my post Why Gold would Always Remain Best Investment for Worst Times which will give you a good insight on Gold.

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