How do banks make money through credit cards?

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.

2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.

3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

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Credit Card Dues

With the interest rate on credit cards increased to 49%, paying credit card dues on time has become more important than ever.

This article that came on rediff explains the need of paying credit card dues on time. It's worth a read.

How to protect yourself from credit card theft or loss?

Credit card/debit card theft or loss may happen to anyone, anywhere, any time. To its worst case, consider a situation where a theft or loss of your wallet happens when you have traveled along with your family to a foreign city and all that you have with you is a little cash for your daily expenses! And that the wallet contains your credit/debit cards, travel documents, travel tickets etc.

The stolen or lost card could end up in mischievous hands and we have been hearing stories of what all happen afterwards. Generous swipings, exorbitant buyings and what not! And the loss of travel documents and tickets would be another nightmare. So is there a service to tackle this? To protect us from the trauma associated with a card loss?

Card Protection is a new service offered in India, which helps credit card customers from the ordeal associated with credit card or debit card loss or theft. In collaboration with CPP Assistance Services, banks such as Kotak Mahindra, Citibank, Standard Chartered, HSBC etc. are offering card protection service for theft and loss for their customers who opt for the service for a nominal fee. A customer can register all his cards, not just the bank's ones, for the service.

All financial and non-financial cards (credit, debit, loyalty cards etc.), fraud protection insurance, emergency hotel and travel assistance, emergency cash assistance etc. are covered under this service. A person who had lost his wallet will just have to call the helpdesk of CPP and they will do the rest; like contacting all the respective banks to block his cards, arranging for the money etc. I guess it’s a good service one can opt for especially the ones who are constantly on the move.

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- Credit card and effective interest rate
- How to best manage your credit card?
- Interest rate on credit cards to increase to 49%

How to best manage your credit card?

Credit cards are very useful and handy if used wisely and if not used wisely, it can give so much of a head ache. So the knack is to use the credit card cleverly.

This article that came in rediff is worth a read as it explains how to best manage your credit card. Have a look.

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- Interest rate on credit cards to increase to 49%

Can we compare credit cards?

When it comes to credit cards, one should be choosing it very wisely as there are umpteen numbers of credit cards on offer by various financial institutions, having more varied number of features. Low interest credit card, one with highest rewards scheme, longer zero interest period, so on and so forth.

When the choices and features of credit cards are high, sites allowing you to compare credit cards available in the market become extremely useful. They allow a prospective credit card owner to find out the one card that suits his needs or an existing credit card owner to find out and keep the one best serving his requirements.

Sites like this will help its users to take an informed decision while going for credit cards. Whether to go for a card with the lowest interest rates or the lowest cost on balance transfer or the highest rewards; the decision can be easily made with help of such sites.

Finacial Control

Even though the plastic money has lot of advantages, credit cards are one of the dreaded financial instruments as far as consumers are concerned, due to the sheer amount of money he/she has to pay in terms of interest for revolving credit and other charges. So, no doubt, this shall be the first of the liabilities a person has to repay.

Considering the ongoing economic down turn, apart from reducing credit card spends, there are a few other things that one may follow to lead a safer ‘financial’ life. This includes maintaining and emergency fund, having a strictly followed budget etc.

This article from rediff explains about various things that you may consider for yourselves to lead a financially safe live in the economic decline. Worth a read!

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- Credit card and effective interest rate
- Interest rate on credit cards to increase to 49%

Interest rate on credit cards to increase to 49%

Banks can now charge an annual interest rate of up to 49% from credit card customers for late payment (revolving credit). Earlier it was capped at 30% by a consumer court order, which the Supreme Court has put on stay on pleas from banks such as HSBC, Standard Chartered, Citibank, American Express etc.

Citibank, in its petition, says,

The facility of credit cards is availed of without any interest for a certain stipulated period and it is only after the expiry of that period that interest is levied on a credit card account for non-payment or late payment of dues. It is also relevant to note that credit card transactions de-facto constitute unsecured credit availed of.

But the question is, how much return (or interest rate charged) would a bank want for unsecured credit through credit cards? Also, the so called ‘stipulated period’ varies with respect to one's date of purchase and payment due date, and can be as less as one day as well.

Banks would have ‘n’ reasons to justify this, but people, bit cautious on your credit card spending from now!

More details here.

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- Credit card and effective interest rate

Financial Products Information

Information is of highest value in the world of finance, especially when we have an umpteen number of finance related products and services available at our finger tips and would want to choose one from those. The ubiquitous internet gives us all the information we need, but being so large also has certain side effects, as the information we seek in the internet would be as scattered as it can be. That is where having a single platform or website for accessing all the information we need helps. Money.co.uk is one such website, where information related to finance can be read.

The portal contains thousands of articles related to the finance area, which is arranged into various categories such as loans, credit cards, mortgages, savings and accounts, insurance, stock markets etc. It also tells us of various financial products and services available around. And the best part is one can do a comparative analysis of various products and services, for example to compare mortgages, and select the best out of the set that fits his or her need. And for those who do not want to buy anything, but just want to know of the latest news in the world of finance, there are separate sections dedicated for the latest finance news.

The credit card section of the site lists down the most popular credit cards available in the market. Also there are various comparison tables in the credit cards section, which are based on features of a credit card such as balance transfer, cash back and rewards, air miles etc. Each comparison table lists down providers of cards having the selected feature. The site also provides credit card quotes. The insurance area is detailed in the site using which we can select quality insurance policies having minimal cost. In both these cases, we can apply for the product right from the website.

The site is updated with latest contents (news, articles etc.) everyday and to keep us updated of new content, they have an RSS feed in the website. Readers can subscribe to this feed in their feed readers to get to know of new articles as soon as something is posted in the site. The site also has a weekly newsletter to which the readers can subscribe to just by entering their email ids. This would useful for those people who wants themselves to be updated with the latest happenings in the finance world but don’t have enough time to visit the site everyday.

Credit card and effective interest rate

Suppose you own a credit card that charges an interest rate of 3.1% per month for revolving credit. What would be the yearly interest rate you end up paying the bank that have issued you the credit card? Is it 3.1 x 12 = 37.2%? Well, no!

Let’s see why.
Consider that you have made a purchase of Rs. 50,000 in your credit card having 3.1% monthly interest and have paid only 20,000 on the due date. The bank will take forward the remaining amount (30,000) to the next month's bill with an interest charge of Rs. 930 (3.1% of 30,000), making the total amount due to be Rs. 30,930.

Now suppose once again you couldn’t pay the entire amount and you paid only 20,000 out of the total due amount of 30,930. The bank will charge an interest of 3.1% on the remaining 10,930 (not 10,000). Thus the bank charges interest on the previous interest amount also or simply, the interest charged is compounded! Due to compounding, the effective annual interest rate will be higher than 3.1% x 12.

The effective annual interest rate, when monthly interest rate is quoted can be found out using the following method.

Effective annual rate = (1 + i/m)^m – 1
where i is the nominal yearly interest rate (3.1% x 12 = 37.2%) and m is the total number of compounding periods in a year (12, since monthly).

Effective annual rate = (1 + 0.372/12)^12 – 1 and that comes out to be 44.25% instead of 37.2%!

Think about a lender who charges 44.25% for the money that you borrow from him. That’s exactly the reason why we should keep our credit card spending to the minimum with absolutely no revolving credit.