Credit Card

CREDIT CARD – BOON or BANE

 

Credit Cards referred as plastic money, is steadily replacing the real money in commercial transactions. They offer a way of convenience in carrying and enable one complete the transactions without the hassles of taking real money. In times of need, the credit card also provides one with real money at selected places through the ATMs. Both the issuer and the holder are benefited through the credit card and for this reason almost all banks issue their credit cards either directly or under branded names. The number of persons using the credit cards also is growing phenomenally across the globe.

 

Credit Cards

 

Benefits and inherent risks for the holder

 

Credit card has dispensed with the need of carrying hard cash and thus helps everybody from the fear of losing the same. In the event of the credit card getting lost immediate information to the issuing authority would help them block the card and thus prevent its further usage. The holder will be provided with a new card. In times of need, when hard cash is required the credit card enable one to draw cash up to a prescribed limit through various Automatic Teller Machines that are installed in many vantage locations and in the premises of the issuer of the card, normally banks. These ATM’s function 24/7 and is very convenient for taking cash at any time of the day.  

 

Credit card provides the holder with the freedom to indulge in acquiring products and services and to pay for the same over a period either in full or in parts. Care must be exercised in the event of part payments, as this is an unknown debt trap landing the card users in great trouble and litigations over a period. Credit card users are given the option of paying the billed amount in three ways, namely i) in full, ii) in part, a percentage of the billed amount or iii) the minimum amount normally 5% of the billed amount. The last type of payment is the root cause for all the evils of credit card usage.

 

The holders are tempted to utilize the full credit allotted on the card thinking that paying minimum amount of 5% every month would be convenient and not taxing. They make their biggest mistake in this assumption. The carried over outstanding in a card attracts a financial charge, that runs as high as 3.5% per month in some instances. This is an exorbitant rate of interest and in very quick time the card holder finds it difficult to meet the minimum commitment every month thus drawing unwanted attention and legal action.

 

Paying part amount of the outstanding, enable the card holder further usage of the card up to the sanctioned limit as the credit limit sanctioned, is per se, a revolving one. Here again, the interest burden will be heavy as the financial charges are levied not only on the outstanding dues, but also on further usages of the card. The holder do not enjoy any free credit period.

 

Hence, the credit card is to be used judiciously to derive the maximum benefit. Save for periods of emergency it is advised to pay in full every month the outstanding on the card.        

 

Benefits for the issuer (Banks)

 

The credit cards are normally issued to persons of standing and credit worthy at a nominal annual charge. This is a source of non funded income for the issuer and is sourced to the maximum. Every time the card is used for any commercial transactions, the issuer reimburses the merchant establishment with the amount less a percentage of commission varying between 1.5% and 3.0%. This again is a source of income to the bank and can be equated as interest for the money reimbursed. This money is received back from the user of the credit card when he pays the card bill amount on the due date. The commission charged by the issuer works out to be on the higher side of the normal lending rates in this instance.

 

The card holder is generally tempted to pay only a portion of the billed amount namely minimum of 5%, and is suggested to carry the balance forward. When part of the billed amount is carried forward by the user then he is charged financial charges for the carried forward amount that ranges anything between 2.5% to 3.5% per month. The financial charges are levied on any further usage of the card and thus continue till such time the entire outstanding amount on the card is paid in full. This brings in substantial income to the issuing bank as the financial charges are far high when compared to the normal lending rates of the institution.

 

While the issuers of credit cards do derive benefits, they also incur losses in the form of unrealized outstanding. However, many issuers do take insurance cover for these unrealized dues and are thus protected. Even otherwise, it is noted that the unrealized dues that the issuers are compelled to write off, amounts to just 2 to 3 percent of the total volume of business and is considered insignificant.

 

Conclusion

 

Despite the good and bad of the credit card both for the issuer and the user, it has come to occupy the center stage in the retail commercial segment of the society. The credit card has provided an opening to acquire things on credit payable over a period though at a cost, without going through any lengthy procedural formalities. The issuer also is benefited in the form of earnings of non funded income and financial charges. In normal lending activities the interest charged is linked to various monetary conditions and these shackles are absent in the credit extended through credit cards.

 

It is said, that the American public have already used two years of their future earnings through credit card purchases and no wonder the legal fraternity in that country has taken special interest in representing the card holders in litigation processes and is helping them secure certain concessions and write off and an extended period of time for settling the dues.