Revolving credit in the case of credit cards is a means of obtaining a deferred payment facility on a continues basis for the purchases made on the credit card. This facility comes in handy when a person is facing cash crunch or has some major financial liabilities to meet or significant expenditure to incur. Whatever the reasons, the revolving credit facility enables the credit card holder to defer payment of his credit card bill to a later date. Let us understand the pros and cons of availing revolving credit on a credit card.
The advantage of availing the facility on credit card is that the cardholder does not have to pay the full amount of the bill. The person needs to pay only the minimum amount, which is about 5% of the total amount of the bill. So, if the credit card bill is, say, Rs 10,000, the cardholder needs to pay just about Rs 500 and defer the payment of the balance amount to subsequent month(s). Also, the balance amount can be paid in instalments in the subsequent months. Hence, the revolving credit facility provides a welcome relief to those facing temporary cash crunch or have other urgent financial liabilities to meet or significant expenditures to incur. Such facility can be availed for a period of three months to 2 years or more, depending on the outstanding amount and the rules of the particular bank.
However, the revolving credit facility comes with a price. The interest charged on the outstanding amount on credit card is anywhere in the range of 3-4% per month, which is undoubtedly quite high as compared to other types of loans (except personal loans). Apart from that, the bank charges you late payment fee, which can be a minimum of Rs 500, as also processing fee and service tax. So, taking into account the interest payment, fees, service tax and other levies, the total cost of revolving credit can go as high 50-60% per annum!
The person availing revolving credit on credit card also loses the advantage of interest free period on subsequent purchases and interest will be charged on all subsequent purchases from the dates on which the purchases are made. Only after the cardholder clears all the outstanding dues on the card will he/she be able to avail the interest free period on subsequent purchases.
Hence, revolving credit should be availed only in the case of an emergency situation or when faced with severe cash crunch.