Thursday, February 26, 2009

Credit Card - What your credit card companies never tell you.

Friends, one of the most radical innovations to have happened in banking and financial services domain is the innovation of plastic money or credit cards as they are popularly known. They added a link to the process of development in unit for exchange of goods and services from physical goods to gold/silver coins to paper currency to credit cards finally.Hence, arguably its a very significant product having huge advantages like freedom from carrying wads of notes in your purse,convenience,some free credit period and most importantly credit itself. But, like every product it too needs to be used properly to derive its optimum benefit else it can hurt ones interest as well. So will take all of you through few of the things that we should all be aware before we decide to take a credit card for self/spouse or kids.
1. Life time free credit card may not really be "Free"
Who wants to pay annual fees for a credit card? No one and hence the whole market is awash with credit cards which claim to be life time free i.e. no annual or renewal charges on the card. While this is true for some cards in the market , it may not be true for all of them. For instance, there are companies in the market who sell their "life time free card" with "spend based reversal system which essentially means that you will have to mandatorily spend a fixed amount on your card within specified time period to be able to attract no charges on the card else you have to pay annual fees on it. For example, SBI Credit Cards used to sell most of its credit cards on SBR only. Of course the agent selling you does not tell you this explicitly on its own . So you must check this.
Also , for those credit cards where there is no SBR, generally the rate of interest is higher as compared to same type of card where you have to pay annual and renewal charges. This is to offset the revenue losses due to annual fee and renewal fee waiver. But at the same time there are genuinely free cards as well. So do your research before signing on the application form.
2. 50Day interest free credit period - Misnomer
I bet the first time you take credit card is because someone told you that it offers you 50 day interest free credit. Wow!! sounds incredibly good isn't it? Well it is not entirely false but one needs to understand the conditions in which it applies. Let me explain
-Generally companies offer interest free credit period of 20 days from the day of billing. So for instance if your bill date is 1st of every month and if you buy a product lets say on 2nd of the month then you will get your next bill on subsequent 1st and from thereon you get another 20 days . So theoretically you do get 50 days free interest period. But then you would appreciate that it requires"timing" of sorts for that to happen.
- Also, the biggest secret that none of the companies explicitly tell you is that the interest free credit period is applicable ONLY IF you don't have any outstanding on your card at the time of purchase. And if you do have even a rupee as outstanding then you don't get any interest free credit period. Read it again to fully understand this. So for ex- if you buy something worth SR 10000 today and the outstanding on your card is lets say 0, then you do enjoy interest free period, but if your card had outstanding of even RS 1 , then no free money and you pay interest from day 1.

3. Cash limit + credit Limit = Credit Limit on the card.
Some people get confused between credit limit and cash withdrawal limit. Cash withdrawal limit is a part of total credit limit only and not over and above the credit limit. Generally its a fixed percentage of the total credit limit.

4. Watch out for insurance bundling
While Insurance is a great product and is a must in everyone's portfolio , one needs to buy it based on his needs on a standalone basis. These days lot of credit card companies bundle insurance (health,accident etc) on your card without really making full disclosures always. This is done generally at the agent level. Why he does it? Commission what else. Also it serves the company in 2 ways
- More fee income for the company from the insurance company.
- Since the premium is paid from the card , it helps them to increase spends per card thereby getting a kicker on the total interest income.

5. Add on card rather than 2 separate cards for spouse
Rather than having 2 separate cards for couples, I recommend combination of primary and add on card for couples for the sake of financial discipline. Add on cards help in maintaining financial discipline since the credit limit of both cards are same that of the primary card i.e add on card does not have any additional limit on its own thereby limiting chances of overspending and extravagance.

6. 2 card policy for people using them on net
Since more and more services are getting migrated to Internet platform, we all need to have a card which we can use to transact on net. Considering the risk of hacking on net, I recommend you to have 2 cards, one for offline purchases and other exclusively for Internet. This card should have a lower credit limit of say Rs 15-20000 only so that liability on any misuse is limited to that extent. You can always indicate your desired credit limit to the company while applying for the card.
7. Fill app form fully yourself and not just sign it
We all hear of horror stories of credit card fraud where the card gets issued in someones name and gets used up by someone else. This is primarily because we generally don't fill the detail on the app form ourselves. We just tend to sign on the form and leaving the job of filling the app form to the agent who might want to use it to his advantage. Remember to always fill your form yourself.
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  1. Find the article very informative and useful.

  2. well written post

  3. Quite a good article...especially the SBR bit which is not widely known