Credit Card

While Debit Cards (Also, popularly known as ATM Cards) are all pervasive, population of Credit Cards is much smaller. This is mainly because (i) it is issued on the basis of credit worthiness / rating of the person and (ii) there is no underlying deposit account against such cards. Let us now discuss the various aspects of a Credit Card for the benefit of the cardholders – existing as well as prospective

WHAT IT IS:Credit card is a plastic card issued by a financial institution that allows its user to borrow pre-approved funds at the Point of Sale (POS) / e – Commerce platform in order to complete a purchase. Almost, all major commercial banks issue Credit Cards. Three major  Credit Card processing companies are VISA, MasterCard and American Express.

HOW IT WORKS: Credit Cards have a maximum amount — or credit limit — the user can borrow during a given period. The credit limit is pre-determined by the card issuer based on the cardholder’s credit rating and credit history.

When an individual uses a Credit Card to make a purchase, he or she is authorising the Credit Card issuer to pay the merchant on his / her behalf. Merchants are required by law to verify that the individual using the card is its rightful owner by obtaining proper identification e.g. a Personal Identification Number (PIN) in case of POS transaction.

Merchants generally prefer payment by Credit Card because they are immediately paid by the card issuer – despite the fee the merchant must pay to the card processing company for each transaction.

Credit Card issuers require the cardholder to pay his or her balance in full, usually on a monthly basis. If the user does not pay the balance in full, the issuer adds interest to the balance, and this interest compounds for as long as the balance is outstanding.

As with credit limits, the cardholder’s credit rating and credit history can influence the interest rate on the card. In some cases, the issuer can raise the interest rate.  Many card issuers offer “teaser rates” that start out very low and increase over time.

Issuers use several methods to calculate interest, and it is important for the cardholder to read and understand the issuer’s disclosure statement in order to avoid unpleasant surprises. Many Credit Cards also charge an annual fee, late payment fees, fees for going over the credit limit, cash-advance fees and foreign-currency conversion fees.

WHY IT MATTERS:

Credit Card interest rates are higher than personal loans or lines of credit. Many Credit Card holders underestimate the time and money it takes to pay off outstanding balances — especially when interest rates are high and minimum payments are low.

It is important that cardholders not only use Credit Cards in moderation, but also take preventative action against identity thieves in order to protect their privacy and identity.

Credit Cards allow cardholders to avoid carrying cash, earn frequent-flier miles, or accumulate other “rewards” that can be used almost anywhere around the world. With many Credit Card types, the cardholder can also get cash advances through ATMs.

It’s important to know the rules of the Credit Card game – preferably before you start playing – if you want to stay out of trouble. The following Dos and Don’ts of Credit Card usage encourage healthy spending habits for new and experienced Credit Card users alike.

Five Things You Should Do (Dos):

  1. Make wise decisions about purchasing items you needversus those you simply want. We’ve all used the word “need” to describe something we really just wanted badly. Using your Credit Card responsibly means recognizing which things you need and which you just want.
  1. Let your creditor know in advance if you won’t be able to make your monthly payment on time. The worst thing you can do is simply forgo your Credit Card payment, no matter the reason. Most creditors will assist you if you let them know before you miss your payment. Simply call your creditor, briefly explain the situation, and ask that any late fees be waived.
  1. Stay within 30% of your credit limit. A large part of your credit score considers the amount of debt you have. Keeping your balances low helps you maintain a good credit score. It needs no elaboration that lower balances are easier to manage than those that are higher.
  1. Negotiate a lower interest rate, especially if your current rate is higher than offers you receive. Your interest rate determines how much you pay for carrying a balance on your Credit Card. Evaluate the interest rate on your Credit Card periodically to be sure you are getting the best deal possible.
  1. Review your Credit Card statement thoroughly each month. Don’t take for granted that everything on your Credit Card statement is accurate. Read through each transaction on your card to be sure that: your last payment was applied correctly, you were charged the right amount for all your purchases, and there are no unauthorised transactions on your Credit Card. Dispute errors, if any, with your Credit Card issuer within 60 days and report unauthorised charges immediately.

Five Things You Shouldn’t Do (Don’ts):

  1. Don’t apply for a Credit Card without reading the terms. Choosing a Credit Card involves more than liking the design or the Credit Card issuer. You have to evaluate the Credit Card based on the fees, interest rates, and rewards if it’s a rewards Credit Card. Comparing Credit Cards to each other – even across Credit Card issuers – is a good way to decide whether you’re getting the best deal.
  1. Don’tuse your Credit Card to make everyday purchases. Items like food, clothing, and gas shouldn’t be purchased with a Credit Card. Using your Credit Card as a substitute for cash is a habit that can quickly lead to debt. For ordinary purchases, leave your Credit Card in your wallet and use cash or Debit Card instead.
  1. Don’t get into the habit of making minimum-only payments. Making only the minimum payment each month increases the amount of time it will take to pay off your debt. It also increases the amount of interest you end up paying. To pay your debts off quicker and cheaper, you should pay as much as you can on your balance each month.
  1. Don’t use your Credit Card to buy things you can’t afford. Living a borrowed lifestyle is the quickest way to get into debt. If you can’t afford a purchase today, chances are you won’t be able to afford it tomorrow, or even next month.
  1. Don’t close out a Credit Card without knowing how your credit will be impacted. There are times when closing a Credit Card can hurt your credit score. Avoid closing cards that still have a balance or those that make up a significant amount of your credit history.
Pulak Kumar Sinha

Pulak Kumar Sinha

I am a retd. General Manager at State Bank of India. I am a Certified Associate of Indian Institute of Bankers and have a P.G. Diploma in Management from All India Management Association (AIMA).
I joined SBI as a Probationary Officer in 1981. Since then, I have worked in various capacities as Branch Manager, Regional Manager and Deputy General Manager at different places. My specialised areas are Credit and General Banking.
I also was Chairperson of Reserve Bank of India Working Group on Evaluation of Feasibility of Aadhaar based Biometric Authentication as Additional factor of Authentication for card present transactions and related issues.
Pulak Kumar Sinha

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Know your Credit Card
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One thought on “Know your Credit Card

  • February 10, 2016 at 10:59 PM
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    It is very informative and interesting to read the nuances. Thank you Sir.

    Reply

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