Credit Card - Posititve Points - Reward Points

With every transaction on Credit Card you get Bonus Points which you can redeem for free gifts or sometimes in cash equivalent (Its true... long back when lifetime free was not a norm, my Dad once paid his annual fee with the help of Credit Card bonus points).

This reward point structure varies from Bank to Bank. Sometimes it is flat and sometimes it depends on your transaction volume. The more points you earn, the more gifts you can redeem.

Sometimes, apart from reward points, now a days you can also get cash backs. Card companies are advertising a lot about 5% assured cash back on any transaction. This may have certain catch (read the fine print) but sometimes you can actually get certain cash back for filling petrol from particular petrol pump (and swipe on a machine from a particular bank) or shopping from a particular super shop. The fine print here is regarding a maximum cash back capped at 500 Rs or it is 5 reward points for every 100 Rs spent.

This cash back and Reward Points are definitely a plus of using Credit Cards.

Credit Card - Posititve Points - Cheaper Goods

This might sound contradictory to earlier post but it is true as well.

Sometimes you see offers on Credit Card of a particular bank whereby you are offered discounts on use of Credit Card of that particular bank. These banks have tie-up with some merchandise and you actually get certain discounts.

For example, certain websites offer you 10-30% discounts on air fares if you use particular Credit Card or sometimes you get EMI facility without any charge (Check this twice to be sure... sometimes they charge processing fees which is ridiculously high). In certain deals you get good bargain because of some promotional event going on at the same time.

Also, if you pay your telephone bill through Credit Card, few companies offer you incentives like 100/200 free SMS or few free local call minutes.

However, make sure not to buy something only because of such offers when actually you may not be needing it... I am talking particularly to my female friends...

Another positive point of Credit Card in next post.

Credit Card - Posititve Points - Free Credit

As the name 'Credit' Card suggests, these cards give you credit which is absolutely free for some duration if you have not committed any sin (of the three which we discussed earlier).

e.g. If my Credit Card statement is generated on 28th day of every month and my due date for payment is (typically) 18 days after that. Then I have these 18 days time period to park my funds somewhere else. This credit period of 18 days is absolutely free period for me if I pay by this due date.

Moreover, if I am smart enough to make a transaction on next day after the statement is generated i.e. on 29th, then this transaction will be reflected in the statement which will get generated on subsequent 28th. So in actual, for that transaction, I get a credit period of 31 plus 18 days which is quite high to be free.

Honestly, I have done this many times. I bought a Galaxy Tab for my Bro using above trick and enjoyed almost 45 days of interest on my money which was still lying in my account. In fact, in India at least, many transactions do not get reflected in Credit Card statement instantaneously. So many transactions which I do on 28th late afternoon or evening do not appear in the statement generated at the end of the same day.

Very small things but goes a long way to help you utilize your card effectively. Hope this point is clear.

Few Positive Points are here too...

After all the frightening charges and penalties, let us look at the brighter side of the Credit Cards. They definitely come in handy, are convenient, safe (to a good extent) and also offer additional benefits like below.

1. You get Credit for some duration free of cost

2. You actually get few things cheaper because of Credit Cards

3. You can earn bonus points and get redemption for using Credit Cards

Just like the Sins, I will explain these benefits one by one...

Hang on...

Credit Card – Sin 3 – Cash withdrawal

Many a times we see advertising from Banks regarding how Credit Cards can be helpful in withdrawing the cash in case of emergency. But there are some basic charges which are different for cash withdrawal from a Credit Card and a Debit Card.

FIRST:

The bank will levy cash withdrawal fee which can be as high as 5% of the amount you withdraw. That does not mean that if you withdraw only 100 Rs you pay 5 Rs as charge. This is so because all the banks a minimum cash withdrawal fee which can be as high as 250 Rs. It simply means that even if you have taken out only 100 Rs even then you will be paying up a charge of 250 Rs.

SECOND:

Just like late payment, bank will charge interest which can be as high 3.75% per month…and if you make any additional transaction from the date of your statement generation, even those transactions will also be charged at the same interest rate (varies from bank to bank though).

THIRD:

Not to forget, the cash withdrawal fee and interest amount also invites Service Charge and Education Cess. So let’s say, your late payment penalty is 250 Rs then it actually becomes 300 + Service Tax (10%) + Education Cess (3% on Service Charge) making it almost 276 Rs. Similar charges apply for interest amount.

FOURTH:

Few banks also apply a transaction fee for every subsequent transaction that you do after you withdraw cash.

So never never withdraw cash with Credit Card unless it is really an emergency and you do not have any other alternative as using debit card or borrowing from someone.

Credit Card – Sin 2 – Part Payment

This is very close to the mistake of not paying the dues within dealine. Consider the charges that this mistake will invite.

Some banks will levy Part Payment fees which can be as high as late payment fees.

All the banks charge you with the interest for the remaining amount from the date of transaction as in case of earlier post and also on the subsequent transactions.

Service charge is also applicable as earlier.

This sin works out more or less similarly damaging your finances as in earlier case.

Take for example: If your Credit Card due amount is 2000Rs and you decide to pay minimum dues (which is usually 5%) which turns out to be 100Rs. Bank will then charge you interest at an exorbitant rate for remaining 1900Rs. If you do not do any further transactions and just keep paying the minimum due every month, it would take you roughly 5 years (to the tune of 6000Rs) to pay bank the debt.

That is how ridiculous this can get.

Credit Card – Sin 1 – Not paying by due date

This is probably as big a mistake as you can do with your Credit Card. Consider the charges that this mistake will invite.

FIRST:

The bank will levy late payment fee which can be as high as 5% of your outstanding amount. That does not mean that if you have only 100 Rs outstanding you can forget to pay as probably next time you will pay 5 Rs as late payment charge. This is so because all the banks have a minimum late payment charge which can be as high as 300 Rs. It simply means that even if you have only 100 Rs due and if you don’t pay then you will be slapped with a penalty of 300 Rs.

SECOND:

Bank will charge interest which can be as high 3.75% per month… (That is not a typo, it is per month) on your outstanding amount from the date of transaction. This interest charge will also be applicable on any fresh purchases that you will do. So for a due of 100 Rs you will pay roughly 45% annual interest from the date of transaction and if you make any additional transaction from the date of your statement generation, even those transactions will also be charged at the same interest rate.

THIRD:

Not to forget, the late payment penalty and interest amount also invites Service Charge and Education Cess. So let’s say, your late payment penalty is 300 Rs then it actually becomes 300 + Service Tax (10%) + Education Cess (3% on Service Charge) making it almost 331 Rs. Similar charges apply for interest amount.

FOURTH:

Few banks also apply a transaction fee for every subsequent transaction that you do after you have missed your payment due date.

These charges apply and are computed from the date of your transactions to the date you have actually cleared the dues. Try to do some maths to find how ridiculously high these charges can be.

More to come…

Credit Card can also make you pay directly

The transaction fees earned from merchants is not the only source of income that Banks have from Credit Cards.

Sometimes you can also be a source of income for banks if you commit any of the following with your Credit Card...

1. You did not pay bill on time

2. You did not pay the full dues on time (part payment)

3. You withdrew cash from ATM with the help of your Credit Card

These three are probably the biggest mistakes that one can do with their Credit Card. Why these things are so serious... I will explain one by one.

To be continued...

Credit Card is not Free

So many of us are carrying the notion that Credit Card is such a convenient way of having money in your pocket without actually having to carry cash... and that too absolutely Free of Cost... WRONG.

I am certainly not talking about annual fees or extra surcharge that Credit Card companies levy.

There is a totally different economics that goes on behind the scene.

Consider this...

Bank gives you Credit Card and then you can swipe it at any merchant outlet in lieu of cash. You get the convenience of not carrying the cash, merchant has the money directly credited to his account. Win-win situation... isn't it?

What does the bank gain?

Bank gets a fee (which is generally varies between 1% to 3% of the transaction amount) that is done on the Credit Card and merchant has to pay this fee. The merchant risks of loosing the customer if he does not provide you the payment by Credit Card facility so he has no choice.

Does that mean that the merchant has his profit margins eroded because of Credit Card transactions... absolutely NOT.

He builds in the additional fee that he has to pay to bank in the price of the merchandise he is selling. By this way he actually gain more on the non Credit Card (cash) transactions as he get the higher price for cash transaction also.

So bottom line is that actually you end up paying higher price for the same merchandise by Credit Card than what you would have paid had you made payment by cash.

So even if bank sometimes act with Holier than thou approach and offer you lifetime free Credit Card, they are not loosing anything.

It is you who end up paying higher.

Hope I am clear in my communication and the notion that Credit Card is free is destroyed for few who read this.

Watch this space for learning the ways to get yourself on the other (winning) side following the same rules.

Lets begin...

I believe there is no need to explain what exactly Credit Card means but nevertheless I will delve in to some background of it before actually coming to main discussion.

One thing which I want to mention is using credit card wisely matters a lot more these days as it could be next worse thing to hit US financial markets after sub-prime. In case of sub-prime, at least the property is held as collateral but in case of credit card debts even that cushion is not there for banks.

So watch this space for much more information and also how credit card can be your best friend if used wisely. Your comments and suggestions are welcome.