Understanding the Costs of Owning a Credit Card

Owning a credit card gives you spending power, but it also comes with certain costs you must understand before applying. These include the annual fee on credit cards, interest charges, late payment penalties, and hidden fees. The total cost of a credit card depends on how often you use it, how you repay your dues, and what type of card you choose. If you ignore these factors, you might end up paying more than you planned. Knowing what affects the cost helps you pick the right card and use it without falling into financial trouble.

The annual fee on credit cards is a fixed charge that some banks apply once a year for letting you use their credit card services. This fee can range from ₹500 to ₹5,000 or more, based on the card’s features. Cards that offer high rewards, cashback, or travel perks often charge higher fees. In contrast, basic cards may come with a lower annual fee on a credit card or none at all. Paying this fee makes sense if the benefits you receive—like discounts, lounge access, or reward points—are worth more than the cost.

Here is a list of extra charges that add to the overall cost of a credit card and often go unnoticed:

Joining and Annual Fees

You may need to pay a one-time joining fee and a yearly charge known as the annual fee on credit cards, based on the card’s features.

Interest Charges

If you do not pay the full amount by the due date, interest is added to your balance and can grow fast.

Late Payment Fee

Missing your due date completely will lead to a late fee, which increases with the unpaid amount.

Overlimit Fee

Spending beyond your card’s limit brings an extra fee, usually calculated as a flat charge or a percentage.

Cash Advance Fee

Withdrawing cash using your card attracts a cash advance fee, even during interest-free periods.

Foreign Transaction Fee

International purchases or online foreign payments include a markup fee between 2% and 5% of the total.

Card Replacement Fee

If your card is lost or damaged, replacing it may cost a fixed fee, depending on your provider.

Goods & Services Tax (GST)

An 18% GST is added to most credit card charges, including fees and interest.

Rewards Redemption Fee

Using reward points for vouchers or gifts may include a small redemption charge, often deducted from the reward value.

Here are simple ways to reduce the cost of a credit card and avoid charges that add up over time:

Pay Your Bills on Time

Missing your due date adds interest and late fees that grow fast. Paying on time helps you avoid these costs and keeps your credit score healthy.

Choose a Card with No Annual Fee

Pick a card that has no annual fee on credit cards to cut down on yearly expenses. Many banks offer such cards, especially for low or moderate spenders.

Avoid Cash Withdrawals

Using your card to take out cash adds high fees and starts interest from day one. Only use this option if you face an urgent emergency.

Stay Within Your Credit Limit

Going over your limit leads to extra charges and can hurt your credit profile. Track your spending regularly to stay under your limit.

Set Up Payment Alerts

Reminders by SMS or app help you pay on time and avoid penalties. They also make sure you stay in control of your card usage.

Check the Terms Carefully

Many hidden charges sit quietly in the terms and conditions. Reading them lets you avoid surprise fees and make better choices.

Use Reward Points Smartly

Always check the expiry date of your points to avoid losing them. Also, avoid cards that charge high fees to redeem your rewards.

Using a credit card with no annual fee is a smart way to enjoy convenience without adding extra costs to your budget. Here is a list of credit card types that help lower the cost of a credit card by removing yearly charges:

Entry-level Credit Cards

Many banks offer basic cards with no annual fee on a credit card, which are ideal for students, first-time users, or people with low monthly spending.

Lifetime Free Credit Cards

Some cards are marked as ‘lifetime free’ and do not charge you any annual fee as long as you stay active and meet simple conditions.

Reward-Based Free Cards

A few cards with no annual fees also offer basic rewards, such as fuel points, dining discounts, or cashback on select categories.

Usage-Based Waiver Cards

Certain cards waive the annual fee if you meet a yearly spending target, which makes them effectively free if you use them regularly.

Benefits and Limitations

While these cards reduce the cost of a credit card, they may come with lower credit limits or fewer premium features compared to high-end cards.

Credit card interest—often called a finance charge—is the extra money you pay when you carry a balance beyond your due date. Unlike loans, this interest is charged daily and can range between 30% to 45% per year, depending on your card and provider. If you pay only the minimum due or miss a payment, the remaining balance begins to attract interest immediately. 

For example, if you spend ₹5,000 and your card charges 3% monthly interest, you’ll pay an extra ₹150 just for one month. 

If this continues, your debt can grow quickly, making small purchases far more expensive over time. To avoid this, always pay your full bill on time and understand how your card’s rate adds to the cost of a credit card if left unpaid.

Many hidden fees can increase the overall cost of a credit card if you're not aware of them from the start:

• Over-limit fees apply when your card usage crosses the approved credit limit, even by a small amount

• Late payment fees are charged if you miss your bill due date entirely, and they grow with the outstanding balance

• Paying only the minimum amount due may lead to higher interest charges over time, increasing your long-term debt

• Card replacement fees are charged when you request a new card due to loss, damage, or expiry

• Statement reprint fees may apply if you request a physical copy of past statements

• Reward redemption fees are often deducted from your points’ value when you redeem them for gifts or vouchers

• EMI conversion charges may apply when you convert large purchases into monthly instalments

• Foreign transaction fees are added when you make international purchases, usually between 2% and 5%

• GST is charged on most credit card services, including interest and processing fees, adding to the cost of a credit card

Here is how rewards and cashback can reduce the cost of a credit card when used under the right conditions:

Earning Rewards

You earn points or cashback on eligible purchases like fuel, groceries, online shopping, or travel, depending on your card’s reward structure.

Offsetting Costs

If used regularly, these rewards can help offset charges such as the annual fee on credit cards, making the card more cost-effective.

Minimum Spend Requirements

Many cards require you to reach a minimum spend before unlocking cashback or reward benefits, limiting their usefulness for low spenders.

Reward Caps and Restrictions

Cards often cap the maximum reward you can earn in a month or year and exclude certain transactions like utility bills or rent.

Redemption Conditions

Reward points may expire or come with redemption fees, reducing their actual value if not tracked carefully.

Maximising Value

To make the most of your card, choose one with rewards that match your regular spending habits and offer easy, free redemption options.

Here are key tips to help you choose a credit card that offers value without increasing the cost of a credit card unnecessarily:

Know Your Spending Habits

Choose a card that matches your monthly expenses, so you benefit from rewards without overspending.

Compare Fees and Benefits

Look beyond the annual fee on credit cards and compare all features, such as rewards, interest rates, and other hidden charges.

Focus on Reward Relevance

Select a card with cashback or reward points that match your lifestyle—like travel, fuel, or groceries.

Check Interest Rates

Pick a card with a low interest rate if you often carry a balance, as it reduces the overall cost of a credit card.

Understand Eligibility

Apply for cards where you meet the income and credit score requirements to avoid rejection and credit score impact.

Review Redemption Terms

Ensure the rewards are easy to redeem without expiry risks or high redemption fees.

Avoid Unnecessary Charges

Choose cards with no or low annual fee on a credit card and stay alert to fees like cash withdrawal or over-limit charges.

Consider Security Features

Look for cards that offer fraud alerts, transaction control, and virtual card options for safer use.

Evaluate Customer Support

Select a provider known for fast, helpful customer service to resolve billing issues or disputes smoothly.