A Financial Boon Of The 21st Century: Credit Card

The 21st century is wildly known as the technological era. We are in the second decade of the century but the changes and growth in technology is mesmerizing. It has touched nearly every other field in the world and has made concrete changes in their development. The technological advancements in the financial sector have made many financial tasks easy and accessible. Though the technology of online banking and transactions were introduced in 1990s, 2000′s witnessed the drastic increase in the usage of this technology worldwide. In the same way, credit cards were introduced in the late 1950s but their usage increased as the world saw more technological advancements in the field. People were very skeptical in the usage of these cards and they were mainly used for international travels and to buy heavy expensive goods. But as banks started offering extra security measures and additional benefits on their usage from the beginning of the 21st century, more and more people are using this type of plastic money.

Credit cards are now considered as a boon. Their easy availability and hassle free use are changing its status from luxury to necessity. One can use them online or in person, in any part of the world. They have succeeded to bring the world closer and accessible in financial terms. Banks around the globe offer various types of credit cards as per their customers’ needs, financial background and credit report. Borrowers have to provide minimum documentation to get a credit card and these cards are approved as quickly as within a day.

Banks offer credit to its customers to purchase or to pay for their desired products. It’s like borrowing money from bank to pay for goods and paying it later in one go or by monthly installments i.e. EMIs. Banks charge minimum interest rate and processing fees on these cards. Some banks also charge card renovation fees every year. By having a credit card, you can pay for goods and services even if you don’t have enough funds in your bank account at the time of transaction. You just pay the total billing amount later when you have funds. If you pay your card bills on time, it will increase your credit score drastically, which will eventually help you in future if you decide to take a bigger loan. Timely payment of credit card bills showcase your ability to pay off your debts on time and it works as a major trust factor in borrowing heavy sums of loan from a bank.

As mentioned earlier, banks offer different types of credit cards as per the financial profile of the borrower. Banks decide the credit limit on your card by analyzing your financial history, credit report, current financial obligations, employment status and ability to pay off the future credit debt. The credit limit is basically a number of amounts which is regarded as the spending limit. Each card has its amount limit for expenditure and the borrower is not supposed to exceed that amount. The credit limit changes as per the usage of the card. These cards also come with a large structure of reward points, discounts and cash back etc. Various e-commerce websites, restaurants, shopping outlets and salons get into agreements with leading banks to offer discounts and reward points to their customers upon purchasing goods or services from them. This helps them to increase their business and customers by offering them discounts.

All the banks which offer credit cards to its customers have come up with comprehensive security systems to protect the account information of their card users. These card comes with a special magnetic chip on its back, which protects the secret numeric information of the card holder. Also, if one uses such a card to purchase goods and services, the money isn’t deducted from their account quickly. This way if someone misuses your card, you can inform the bank to block the card and would not have to pay for the wrongful transactions done on the card.

Having a credit card is a responsibility along with being a luxury and necessity. Though these cards are easy to use, one should always be careful not to misuse it. You should always pay your card bills on time to avoid late payment charges levied by banks. Also, you should always maintain your credit utilization ratio. That means you should not exceed your credit limit on the card. Also, you should not keep it unused. Not using your given credit can also prove to be harmful for your credit report. Credit cards can be used to withdraw cash from ATMs just like debit cards. But banks charge transaction fees of ATM withdrawals done on these cards. So unless it’s really necessary, you should avoid withdrawing cash from ATMs using these cards. Many people fear that having a credit card may turn them into a shopaholic. But you have to control yourself to avoid spending more than you will be able to pay back. You should avoid going on unnecessary and uncalled for shopping sprees.

Credit cards come with many benefits like reward points, cash back offer and discounts. You should use these benefits, neatly. Know where you can use these benefits and how it will prove profitable to you. Do not forget to check your monthly credit card bill. This will help your to keep a track of your expenditure. It will also help you with your monthly financial planning.

7 Things to Consider When Applying for a Payday Loan

If you are going through tough circumstances, payday loans may sound a tempting option to you. But if you are not an experienced person, we suggest that you consider this option after a lot of thinking. Since these loans feature a very high interest rate, they shouldn’t be taken unless you have no other option. Below are 7 tips that may help you make an informed decision.

Financial charges

The amount of loan you will get is a lot lower than what is written on the check. The reason is that finance charges are deducted from the amount, so you will need to write a check plus these charges. Not doing so will result in a higher rate of financial charges that you will have to pay. Most people get into even bigger trouble when they fail to pay the principal amount along with interest. So, make sure you know how much you are getting and how much you will need to pay back down the road.

Paying back

If you don’t have enough funds in your account to pay back the loan, you may try other options. For instance, you may renew the loan amount or consider taking out another payday loan. But keep in mind that this new loan will have its own financial charges and extra fees. And the extra fees are actually incur because of late payment of the amount of loan.

State Regulations

In each state, regulations are different for payday loans. Usually, the term limit is not more than 30 days. The problem is that lenders often issue loans that feature a longer term limit. In this case, you are at the lender’s mercy, which is a situation you may not be willing to go through.

Cash crunches

As said earlier, the purpose of a payday loan is to deal with a temporary financial crisis, and we have to pay back the loan as soon as we are out of the financial trouble to avoid high interest and fees.

So, it is not a good idea to be tempted by the “roll over” trend or you may have to pay a huge sum at the end.

Financial position

Usually, these loans are for borrowers with lower incomes as they can’t afford to borrow from other sources. Here, it is important to keep in mind that lenders don’t usually take into account the financial position of those who are applying for the loan. So, you have to think harder before opting for this option.

Automatic rollover

You need to be aware that there are some loan sites that tend to rollover the loan amount automatically. And then there are sites that have some contractual agreements that state that you, the borrower, do not have any right to file for bankruptcy or file a lawsuit against the lender.

Approval

A great characteristic of payday loans is that they are easy to get, meaning the approval process is quite easier than other types of loans. So, most borrowers find them quite tempting, but you should be careful and only opt for this option if you have no other choice left.

You may say that opting for a payday loan is a good idea to deal with a temporary financial crisis, but a hasty decision may get you in a bigger trouble. If you don’t be careful enough, you may end up in a vicious circle of debt. Therefore, it’s better to pay back the loan as soon as you get your hands on some extra cash. Hopefully, keeping these tips in mind, you will take this decision.

How Do Credit Card Companies Make Money?

Credit cards have gained much popularity in India over the last few years. Public sector banks as well as private banking institutions have come forward to launch a host of credit cards suiting customers with different types of needs. HDFC Credit Cards and SBI Card are the two companies with the largest market share. While banks are ready to offer you with a small loan in the form of credit cards, have you ever wondered how these banking institutions make money from these ventures?

The three main ways how card issuers make money is through the annual fee of the card, interest charged on late payment, penalties on skipping EMIs, etc. At the same time, they also earn from the businesses that accept these cards. Businesses are required to pay transaction fees to the banks which also makes up for significant earning of the card issuer banks.

But before we dig deeper into how they make money, let us first understand the term ‘Credit Card Companies’. It is easy to get confused between credit card issuers and credit card networks. An issuer is the bank or financial institution from which you take the card. You are taking a loan from the card issuer and paying back to them. A credit card issuing company is usually a bank. On the other hand, credit card network refers to companies that process the transaction. Currently, there are three main networks in India- VISA, Master Card and RuPay. Apart from these, American Express and Discover cards can also be found.

So, when you make a transaction with your credit card, your money moves electronically from your bank through the network to the merchant’s bank.

How do credit card companies make money?

As mentioned above, your bank makes money majorly from you and also from the merchants where you use the card issued by the bank to make the payment. Banks or financial institutions make money in the form of-

Fees

Banks charge different types of fees from their cardholders- some fees are to be paid by everyone whereas other types of fees are levied on condition. Let us talk about these fees and charges-

  • Annual Fees- You have to pay annual fees towards your credit card, especially when you are an elite cardholder and enjoy higher benefits than normal users. This is to be paid by all users. However, some banks may set a condition of spend based annual fee reversal scheme.
  • Cash Advance Fees- When you withdraw money from an ATM using your credit card, the bank charges a minimal fee for it which is usually correlated to the amount you withdraw. This is also included in the card issuer’s earnings.
  • Late Fees- Your card issuer charges fees from you if you delay your EMI payments. Banks make more money from late payers in the form of late fees.
  • Balance Transfer Fees- When you transfer outstanding balance from one card to another, the bank charges fees from you which again becomes its earnings.

Interest

The bank or financial institution has just gifted you a credit line. You have to pay the interest for the loan that is offered to you in the form of credit card. This interest cost adds to your expenses and is a method of earning for the banks. Interest on credit card is charged on daily basis for as long as the amount stands outstanding in your account. This is why experts always advise you to pay the total outstanding amount in full every month because interest will accrue on any amount that stands unpaid.

Let us understand this with the help of an example. Suppose the billing date is on 4th of every month and payment due date falls on 29th of every month. APR = 24%

  1. 10th March- Apparel Shopping- Rs. 5,000
  2. 13th March- Bill Payment- Rs. 2,000
  3. 19th March- Gadget Purchase (converted into 6 month EMI)- Rs. 12,000
  4. 22nd March- Dining Bill- Rs. 1,000

Now considering that the person does not have any outstanding amount from the previous bill, he will have to pay Rs. (5,000 + 1,000 + 2,000 +2,000) = Rs. 10,000.

This will be the total amount due on 29th March. Now if the person chooses to pay only Rs. 6,000, the remaining Rs. 4,000 will accrue interest for each day until the amount is paid in full. Considering that the user again pays Rs. 2,000 on the 10th of April, let us see how interest cost works out-

Interest = (outstanding amount x 2 percent per month x 12 months)* (number of days)365

In this case, the total interest charged would be Rs. 52.60 which is a total for Rs. 4,000 that lies outstanding for 11 days and Rs. 2,000 that lies outstanding for 18 days until the next payment. This is the reason why those who only pay minimum amount due tend to fall into debt burden sooner. Cardholders should also note that when an amount is outstanding in your statement, the new purchases that you make are not eligible for the interest free period. This is why interest charge is the easiest way how banks make money out of your credit card.

Interchange Fee from the Merchant

When you use your card at a merchant terminal, the merchant also pays a percentage of the amount to the bank as processing fees. This will also be added on to the bank’s earnings. It usually ranges between 1 to 3 percent of the transaction value but may differ from merchant to merchant.

How to save yourself from paying too much to the bank?

Savvy customers plan their transactions and payments in a way that they have to pay the least amount to the bank. These are the habits you can adopt to cut your costs-

  • Pay your entire outstanding balance every month; just pay the minimum amount due is not a good practice.
  • Set alerts for your payment due dates to avoid missed payments which entail late fees.
  • Create an emergency fund to replace costlier options like cash advances from credit card.
  • Choose low annual fee or free credit cards and even if you select a card with high annual fee, make sure that the rewards are worth it.