Credit Card – A Prey to Financial Management

Over the last two decades, all salaried people have predominantly used this. Some banks might provide us with accessibility to CC at the time of salary account opening. On average, every person is holding 2 cards minimum. As it has become a vital financial product in our life, we can look at an overview of how it is been operating and how it affects our financial progress towards our financial freedom.

OVERVIEW OF MARKET:    

          In 2019, credit card companies had a user base of 47 million in India. However, the market has a projection to grow at CAGR (Compound Annual Growth Rate) of 25% in 2020-2025. This market is going to be considered as one of the fast-growing in the finance industry. In India, the credit card companies are led by HDFC, SBI Cards on their customer base.

PROCESS OF CREDIT CARD (CC):

          Basically, CC works as an intermediate between a cardholder and the shopkeeper with a swiping machine. We have to understand a few title tags to learn about the process.

1.    CC Company – The company which issues the card.

2.    Issuing Bank – The bank, which is the parent of the CC company, pays money on behalf of the customer. Eg, SBI bank for SBI Cards.

3.    Acquiring Bank – The bank receives the payment on behalf of the shopkeeper who swipes the machine.

4.    Network Medium – The total transaction cannot be done without a medium. The medium is called Network Medium. Example, VISA, MasterCard, Rupay, etc.

With these terminologies, let us move on to the process,

          When a buyer who holds a CC, swipes in a shop to purchase a product worth Rs. 1000, the payment is done by Issuing bank to Acquiring bank that is the shop keepers bank account. So, the issuing bank will not pay the total Rs. 1000, it pays 97.5% of the amount to Acquiring banks. The Acquiring bank takes, 0.5% as its service charge and provides only 97% i.e. Rs. 970 to the shop keeper. Also, both issuing bank and acquiring bank has to pay some commission to Network Medium, it may be maximum of 0.02% totally.

          Ultimately, the shopkeeper seems to be the loser, but 3% of the charge is a promotional charge that makes a customer buy their product.

          The customer will be given a cycle period of 45 days for every payment. For example, if the cycle period starts from 1^st of a month to 30^th the same month, the bill rises on 1^st of the consecutive month with a payment date of 15^th of the next month. So, on the whole, the purchase you did on the 1^st day of the cycle will have 45 days payment period, if you purchase on the last day of the cycle, you will be entitled only 15 days of payment margin.

CREDIT CARD – INCOME SOURCE FOR THE COMPANY:

          There are multiple ways for a company to earn through CC. They are as follow:

·       DIRECT PAYMENT: This is the payment which an issuing bank gets as 2.5% and provides remaining 97.5% to acquiring bank, once a customer swipes their card at any merchant shop

·       LATE FEES PAYMENT: The payment which the company collects if the customer fails to pay the minimum due. The few may vary from Rs. 500 – 1500, depending upon the card type and its privilege.

·       INTEREST PAYMENT: If we pay only minimum due, and fail the remaining outstanding amount, the remaining outstanding amount will be charged 24-60% interest rate per annum depending on your card issuance company T&C.

·       ANNUAL FEES: Many card issuance company has a separate payment structure called, Annual Fees. These charges are the amount for maintenance of card and services offered by the company. The annual fees vary from Rs. 500- Rs. 5000 per month.

·       PROMOTIONAL PAYMENTS: We might have noticed this while we purchase any mobile or other electronic goods through online. There will be a pop-up offer up to 20% for the payment using some CC. This is known as promotional. Because of the offer, the company makes the customer to buy the product. So, there is another method of payment to the Issuing banks through promotional.

HOW CREDIT CARD AFFECTS OUR FINANCIAL MANAGEMENT:

·       The foremost, it will convert everyone from delayed gratification to instant gratification and buy the products at instant. This might become a big habit shift in our life.

·       The payments like annual fees and other charges are really worthless for our financial management.

·       If you forget to pay the outstanding amount, the interest rate is very huge compared to all type of debt instruments.

·       Most people use CC as an EMI option, it is the worst decision one makes in his life, it will make you to build your debt like a giant mountain.

·       The promotional offers make us buy the products without knowing what we have in our savings.

·       This will obviously, make us a spendaholic.

·       We are used to spending without any plan and once the bill comes, we don’t have any clue on where did we spent. It creates more pain in life as we only pay the minimum due and pay interest for outstanding.

·       There are many people or first time user of CC user, who might have an experience of closing the outstanding by taking a personal loan.

WHO ARE THE BENEFICIAL OF CREDIT CARD?

           People who work in corporate, have a feature of claiming all their expenses related to official work after a month can avail and use CC, where they might be having a pay gap of 15-45 days within which they can claim from company and payback to card.

          These people should use the card only for their official purposes and should never use for any personal transactions or purchases.

          There shouldn’t be any theory stating that we can use CC for any emergency purpose. It’s your duty to accumulate an emergency fund separately.

CONCLUSION:

·       Basically, most of us of don’t have the knowledge of Credit Cards and its process structures, but we apply for 2 cards on average per person.

·       It takes your total money from your pocket, if not paid on time. The interest rate is huge when compared to all other debt instruments available.

·       To have a stability in your financial management, you have to completely avoid credit cards as it makes you spendaholic.

·       Never ever do EMI purchase with the help of your CC.

·       Always pay all your outstanding due completely before the due date, so that you will be safe from its hunger.

·       Unless you have to claim your expenses related to your corporate companies, please avoid using CC. It is a real prey for your financial management.