TechECE

machi i morally against credit cards. For me any form credit is danger for me. So, no credit though loan is acceptable. :)

why do u need a credit card?

 

Even I had such an aversion towards credit cards and thought those plastic gizmos are yet another knavish marketting strategy. But it could prove useful when u wanted..

1) to buy anything in the net.
2) to purchase air tickets thru phone/net.
3) to use as a backup incase of unplanned expenditures say, shopping during travel or something like that.
4) to use it as a kind-a immediate loan. say, u wanted to spend 50 K for some thing and u know that u can pay it with next month sal. So, u could use credit card as interest free loan?! :-)
5) Last and least important too, there are some discounts and bonus gifts for using credit cards.

 

If you doubt abt the whole system...ie. if u have a question like "why do banks want to give paisa without any interest" then... here is the fwd..


Read on the conversation to understand the funda:

Priya: I want to buy a Sony digital camera costing Rs.20,000, but I don't have any cash right now.

Raj: Why don't you use your ICICI Bank credit card? Never heard them say ' Hum Hain Na '?

Priya: I am quite skeptic about using these cards. I pay using the card, get a bill after 30 days and pay after another 20 days. This is a maximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%.
Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) = Rs. 301.40.

Here the bank is giving me a loan without interest when I use the credit card. Something is wrong somewhere!

Raj: Well let me tell you how it works when you use your card to pay for the camera.

You present your ICICI Bank credit card ' a VISA card.
Sony World swipes your card on a machine provided by Citibank. Lets call Citibank, the acquirer bank and the process of Sony World swiping the card on that machine, requesting authorization.
Citibank communicates with the card issuer, ICICI Bank through VISA Network to check if the card is valid and has the required credit limit.
ICICI Bank reviews and approves / declines which is communicated back to Sony World.
You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to ICICI Bank. Data on this receipt can be captured electronically and transmitted.
At the end of day or at the end of some period Sony World chooses:

Sony World submits the receipt you signed to Citibank who pays Sony World the money. Sony World pays Citibank a fee called Merchant Discount . Let us say this is 6% of the sale value = 6% * 20,000 = Rs. 1200
Citibank sends the receipt electronically to a Visa data center which in turn sends it to ICICI Bank.
ICICI Bank transfers the money to a settlement bank which in turn transfers the funds to Citibank.
Citibank pays ICICI Bank an Interchange Fee of 4% of the sale value = 4% * 20,000 = Rs. 800
20 to 50 days later ICICI Bank gets the money from you, and you don't pay the interest!!
Priya: Interesting! So Sony World pays more than the interest that I should have paid for the loan that I take. I, as a cardholder have the following benefits

1. Convenience of not having to carry cash.
2. Credit availability, free of interest.


However what benefits does Sony World get for paying so much money? Isn't it more profitable for them to take cash? They can save as much as Rs.1200.

Raj: Certainly. Some retail outlets offer you discounts if you pay by cash, don't they?

However when you don't count the money that you are spending, you tend to buy more! Cards encourage this, called impulse purchase .

If you did not have access to credit, you would not have bought the camera this month, or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

Priya: So ICICI Bank uses this money to pay back to us when they announce 5% cash back. They insist that the Sales draft that I sign at the retailer should also be from ICICI Bank. This means they are saving on the Interchange Fee and also pay me a part of the Merchant Discount that they get.

Raj: Exactly! If you have noticed, ICICI Bank gives you the cash back in the next credit card statement. They keep the 'cash back' money for a maximum of 60 days before passing on a part to you. This accrues them interest too.

Say if ICICI Bank earns an interest of 6% per annum for the cash they carry they get Rs.1000 * 6% * (60/365) = Rs. 10

That is not huge, but money nevertheless. And when you consider that almost everyone in this city shops with a credit card these days, it is a big sum.

Priya: And that also explains why banks tie up with petrol pumps like ICICI Bank has tied up with HPCL and I could re-fuel there without having to pay the fuel surcharge of 2.5%. The card issuer and the acquiring bank is the same and that saves interchange fees.

Raj: Good! You seem to have figured out how it all works! Let me summarize:

 

machi, i am able to fathom how it works. Somehow there is some blind block. may be i have not buying beyond my limit yet.
anyway we have deviated from ur original question.
which is the best at present?

 

Okie - my 2 cents and perhaps something more on CCs.

To say it in a single line - "Credit Cards are really useful if you know and play the game well" :)

They give you immediate access to money for things which u need in an emergency - that alone is enough for me. Further, if you put in enough thought, you can really plan your expenditures and still maintain a healthy bank balance. BTW - never draw money from an ATM using the CC since the "free credit period" does not apply for it. Interest from the day u drew money.

Get a CC from an international bank - HSBC is one. Citibank is something i'd recommedn - i simply love their service. Simply coz you should find the card useful when u travel. There are no fixed rules reg the credit line - the higher the better. Try to get a card through these agents who get you the cards with the service charges waived. They can come upto 1500 per year for the gold cards i guess.

The important thing to consider is the free crdit period. normally it will be 30 or 45 days i guess. It depends on their billing cycle. For a cycle starting 25st of every month, they will send u the bill by the firts week of the next month and ask u to pay by the 15th (ICICI has this scheme). So for anything you buy after the 25th of this month (March) - you will have to pay by the 15th of (May). That's 2 sals away. Cool right!!!

I primarily use ICICI and Citibank - coz their billing cycles help me balance my expenses. ICICI's cycle starts by 25th and Citibanks by the 7th i guess. So - i alternate b/w the cards for my expenses and kind of end up paying only one card per month.

I own 3 CCs (the 3rd being a SBI gold card) and find the whole concept to be useful.