How to Best Manage Credit Cards

A credit card is a useful tool, when managed judiciously but a lurking danger if you mismanage it.

One of the first things you need to keep in mind is to read the term and conditions, when you apply for a credit card. It could be a laborious process but something that has to be dealt with, to protect yourself from any rude surprises that might be in store for you in times like this.

One hears stories of money being taken from the savings account of a person who has a credit card with that particular bank! Well, banks are allowed to do so, when a default occurs, the clause is covered in the terms and conditions.

Banks also have an auto debit facility to claim a minimum payment on credit borrowed, if in case your account does not have enough funds, banks are allowed to levy a fine, which varies from bank to bank. So ensure you always have sufficient funds, when you opt for the auto debit facility to cover your minimum payment due. But there's more to credit cards.

Profit from your credit card: Credit cards can be useful when you make a profit out of it! Now, how is that possible? Well, it all depends on the kind of card you purchase.

It is best to opt for a lifetime free credit card that does not have an annual fee attached. Also get a card that matches your lifestyle. If you shop a lot, see that your card offers a lot of discounts and cash back rewards for all the shopping you do with your card. If your job allows you to make frequent trips, get a card that gives you several travel friendly schemes on eating out, hotel stays and airline ticket discounts.

High interest rates: Though the whole point of having a credit card is to provide you with cashless convenience, it makes money sense to decide, when, how and why you should use it.

Never get tangled in the web of debt, especially when it comes to credit cards. Although it is an ideal resource to tap into, when you need to ramp up funds quickly, the interest rates charged on a credit card are much higher than even those charged on personal loans.

Remember that cash withdrawals from an ATM with your credit card will be charged a processing fee of around 2 per cent and an even higher rate of interest than your regular purchases on the card.

Taking a loan on your credit card: Most credit cards do offer an EMI (equated monthly instalment) facility to pay any loan you take on your credit limit. It normally takes just one or two business days to obtain this loan and this can even be arranged over the phone with no documentation.

However, the difference lies in the high interest rate charged, which can be an annualized interest rate of around 30-42 per cent. The cards that offer a comparatively lower interest rate in the range of 22-26 per cent most often do not have an EMI facility for repayments.

Though a credit card seem like a good bet for short-term fund requirements refrain from using it unless you can make the credit card usage count for some kind of benefit.

Using your credit card purchases for an interest-free period is fine, but remember the bank can do away with interest-free periods anytime it chooses to and can also hike the interest rates, according to its free will. Hence, be wary of a credit card and use it sensibly. Another important aspect in managing your credit card is to keep a careful tab on your credit card statement that should reach you on a monthly basis.

Understanding your credit card statement: Scrutinize your credit card statement to understand your spending pattern. If a bill does not arrive on time for you to pay your dues, report this to the bank immediately. Also keep track of the credit card bill through your online banking account.

The first detail you need to clarify is your name, billing address, card number et al to make sure it’s correct. The second aspect is the total outstanding balance and current due date for payment. This column will also have the previous month's transaction using the card. Here is an example:

Previous balance	Current outstanding amount	Total amount outstanding	Minimum payment due	Payment due date
Rs 5,000	Rs 3,000	Rs 8,000	Rs 320	25-3-09

Minimum Payment Due: The date for the minimum payment due allows you to pay up a small amount upfront and this is usually in place to protect your credit score.

However, as a practice ensure that you pay the total amount due before the minimum payment due date to maintain an impeccable credit score else you will be levied interest on the balance amount pending if you continue to pay the actual amount due in full only after this due date. If you fail to pay even the minimum amount due you will incur a late payment fee as well.

Transaction Details: The second aspect to be scrutinized is the list of purchases or transactions done throughout that particular billing cycle. Go through each particular of this list to see if they match your expense records.

Usually your statement will have a reference number that can be quoted if you feel any charge specified needs to be clarified. Utilizing your reference number for billing errors and unauthorized charges

Always commit in writing within 60 days (this time period varies from bank to bank) of the receipt of your statement the complaint regarding the billing error or unauthorized charges. Include all the following particulars in your complaint:

· Your name, address, account number and reference number

· Error description

· The date and amount of the charge

· Reason cited for the dispute of charge

Check your credit card statement if there is a specific address to which the complaint has to be sent to. This might be at the end of the statement or as part of the fine print, behind the statement.

Your credit card statement also has the other particulars like:

• Credit Limit: This is the maximum limit up to which you can make purchases or withdraw cash on your card. This credit limit can be revised by your credit card company depending on your credit score and your repayment track record.
• Available credit limit: This will be the amount you can still avail after you have made a bunch of transactions using the card. For instance, if you have a credit limit of Rs. 1 L and you have made purchases worth Rs 25,000, then your current available credit limit would be the balance, Rs.75,000.
• Cash limit: This is the actual cash limit up to which you can withdraw on your card, which is included in your credit limit.
• Statement Date: The billing cycle ends on a particular date after which the statement is printed, the interest rates applicable for your card transactions are calculated using this statement date as the starting point.
• Total outstanding Amount Due: This includes past and present credit expenses and other charges levied to your account.
• Reward Points Summary: This provides you cash discounts and other benefits on purchases made when accumulated over a period of time. This column contains all the past points earned and utilized by you till that particular billing cycle.
• Grace Period: A grace period is the number of days you might get as relief before the high interest rates start kicking in for the remainder of the amount that is due. This can be anywhere between 20 and 25 days.

How to Protect from Credit Card 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 travelled 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.

How Banks Make Money Using 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).

Bank also gives an offer to the customer to convert the O/S balance into EMIs for which they may charge a processing fees plus a regular interest rate between 1 to 2 %.

If a bank agrees to take your deposit, they don't keep it all in the bank. Because only a small percentage of the bank customers will demand their money at any given time, a percentage of all deposits, called vault cash, is kept on hand. The rest is loaned out, so that it can earn interest. Some of this cash is loaned to credit card companies, so that they can finance the purchases their customers make, until the customer pays the credit card company back. Actually, most credit card companies are organized as banks, so that they are regulated in a different way than regular companies. Because of the way the accounting system works, the more money that is owed a company or a bank, the more that the company or the bank is worth. Even though the debt may be uncollectable, it can still be shown as an asset on a balance sheet. So, the more money that the credit card company can loan out, the more money the credit card company is worth. (On paper.) This is why we are constantly receiving offers for credit cards, even if we have just declared bankruptcy.

In addition to that bank also gives a balance transfer option. To avail that option customer has to pay charges. Again an income for the bank... :)