What is the Credit Card: Who Actually Pays for Credit Card Benefits: Should you Own it: The Complete Guide about Credit Card

In this post I’m gonna share you the whole information about credit card like What is credit card actually? Who Actually Pays for your Credit Card Benefits? Should you Own a Credit Card?, and more.

We use the bank to withdraw or deposit money or to take a loan. In order withdraw and deposit money, the bank provide us a debit card so that we don’t have to come to the bank.

Similarly, If we want to buy something, or to take short term loan, we have provided credit cards.

It is not given to all, it has been given to those on whom the bank trusts, means the people who earn by working every month.

The bank does not earn from the manufacturing plant. The people deposit their money in the bank and the bank gives that money on loan and earn interest.

The Interest is a major way to earn money of banks. Therefore the more people take loans, the more it will be beneficial for the bank.

Taking a loan from a bank is a very complicated process. We have to go to the bank frequently, verification is done, we have to give cancel cheque and many more.

That’s why a person takes a loan only when their is a great compulsion.

To make it simple, the bank start giving credit cards, which is the shorter version of the loan and its access is very simple.

The bank has given an easy digital card to its trusted customers, so the people’s habits get spoiled.

Because when someone take a credit card so he doesn’t feel like he’s taking a loan, even they feel like when they will need money it should be with them, so they keep this.

As soon as customer takes the credit card the bank introduced the offers.

The offers are also very interesting like loan for 50 days without any interest and keep paying EMI throughout the year, cashback, reward points, free movie tickets, no cost EMI, and many more.

But have you think ever that why the bank giving everything for free. 

See, bank gives 1 lakh of iPhone for a year with no cost EMI without any interest, so what is their advantage in this process, even they are giving it to an unknown man.

On today’s date, when people sell air tied in balloons, so why is the bank giving everything for free.

The bank is not doing charity, by spending the large amount of capital on staff and marketing.

Unless the bank earns, it will not give you anything for free.

The money for all these is taken form your pockets and How?, now you will understand in this post.

We will understand each of concept of banking system and their credit cards in detail.

What is the credit card actually?

The Credit is a type of digital card provide by banks in order to take short term loans for buying something online. 

Bank gives credit card to only trusted customers, I mean who are able to earn money on monthly basis.

If you want credit can, then you can also apply for this.

The process of applying for credit card is similar to the debit card.

The credit card works in such a way that if your account has no money, and you wanna purchase something online, then the bank will pay for that.

But you will have to return that money at the end of the month with the interest they have charged.

How to use Credit Card? Rules of using credit card

When you use a credit card there are certain rules for this, which the bank has named the credit card cycle.

Let’s understand the credit card cycle with an example.

A credit card whose cycle is from 1 Sept to 1 Oct that means All the shipping you will do across this period of time, the bill will be generated on next day I mean 2 Oct, and you can pay it after 20 days.

This means if you have bought something on 2 Sept, so you get 50 days to make payment.

The Bank gives you this long time, because In this period from 1 Sept to 1 may, you can shop more and more using the credit card and bank gets benefits of each transaction.

This is the first way for the bank to earn money from you.

Credit card payment network companies 

To understand the whole game of credit card you have to understand one thing, that is network companies.

Network companies means like Visa, Master Cards, American express, they are network companies.

And the name of the Indian Payment network company is RuPay.

A long time ago when ATMs were come, you could withdraw money from the ATM of the same bank.

If you have an ICICI bank debit card, then you could withdraw money from the ICICI ATM itself.

While the technology of ATM credit /Debit card was the same for every bank. If bank wanted, they could allow using each other’s ATM’s.

But even after that, they didn’t allow to use it. Because for that, the banks would have to share customers details amongst themselves.

And If that were happened, their customers details would have gone to their competitors.

Like If ICICI premium customers detail are gone to HDFC bank, so there’s a kind of fear that HDFC can attract ICICI banks customers toward it by proving new offers and make them their customers.

By using common ATMs, both the banks are reaching each other’s customers.

We see, that any of the business won’t share its customer’s data with its competitor, so their fear was genuine.

Here Network companies comes into the picture such as Visa, MasterCard, American express, RuPay, etc.

Network Companies said that, 

In this way of sharing common ATMs, every bank is at loss, many machines will have to installed in India. We will have to invest a lot of money and also will have to use large infrastructure.

So you can do one thing that don’t share the details of customers amongst you. Gives these details to us. 

We will verify details of whoever bring the ATM card. And as soon as the details are verified, allow each other to perform transactions at each other’s ATMs and the details of customers will not be shared with anyone. we will keep them very secure with us.

This policy of network companies has been accepted by every bank.

Since then you can withdraw money from any bank’s ATM with any bank’s debit card.

Similarly if you have a credit card, and shopkeeper has a machine of any Bank, it will work perfectly. It is done through a Visa, MasterCard, and many more transaction network companies.

All the people who do money transaction by using the card, the data is with the network companies.

Visa, MasterCard etc are American companies but the government has imposed this rule, that the companies will have to keep all the data from India within India. That’s why the data centre are in India.

But using visa or MasterCard, you can make transaction across world.

Any bank in the world will verify your data with the network companies, and lets you to make the transaction.

Network companies aren’t doing all the things for free of cost. 

so let’s understand how a bank and network companies earn money on each transaction with an example.

How a banks and credit card companies earn money on each transaction?

When you purchase anything with your credit card, four parties are involved in each transaction ,which are:

• Network Companies
• Issuer Bank
• Acquiring Bank
• Shopkeeper

Network Companies

The first party is network company. I have already told you about the network companies, and there working system.

Issuer Bank

The second party is Issuer Bank whose credit card you have.

If you have a credit card of HDFC Bank. In this case issue bank will be HDFC Bank.

Acquiring Bank

The third party is Acquiring Bank. The bank whose machine used by shopkeeper in order to deduct money from your credit card is called Acquiring Bank.

If the shopkeeper has machine of ICICI Bank. In that case ICICI bank is acquiring bank.

Shopkeeper

The fourth party is a shopkeeper.

Suppose you have bought goods worth rs 100, and for its payment you took out HDFC Bank credit card.

And shopkeeper deduct money by putting the card in the ICICI bank machine.

In this case HDFC Bank is a Issuer bank and ICICI bank will be acquiring Bank.

As soon as you put your credit card in the machine, the network company like visa, Master Card and American express will verify the details of the transaction and will approve Issuer and Acquiring Bank.

As the soon as the approval from the network company will come, Issuer Bank will give rupees  98 rs to the acquiring bank and will keep 2 rs with itself.

And acquiring Bank will keep 1 rupee from that 98 rupees and will give rupees 97 to the shopkeeper.

Now out of the remaining 1 rupees, the acquiring bank will give 50 paise to the network company, and will keep 50 paise with itself.

By the transaction of 100 rupees, the bank whose credit card you have that bank earned 2 rupees, the network company earned 50 paise, and the remaining 50 paise are taken by machine’s Bank.

This was only an example to explain. The percentage keeps changing.

This is the reason why shopkeeper refuses or ask for extra money when you use a credit card.

The shopkeepers of metro city or in the malls, they are step forward. They have already added the amount to the product.

This amount seems very small, but on the large scale it’s very big amount. 

This is the reason why Visa and MasterCard are growing so fast.

Valuation of visa company is more than 450 billion dollars. Where as the MasterCard valuation is around 340 billion dollar.

These companies are the biggest payment processing institutes across the world and their growth has been very good in 5 to 10 years.

You subscribe to Netflix or Spotify with the credit card, and for shopping you use Amazon, right. So these companies are US based.

With recent correction, major US companies like Amazon, Google, Tesla and the price of Apple stocks reduce a lot. And exports are saying this is the best time to invest in US stocks because these big companies will definitely grow in the long term.

When the transaction is done, in the whole case, the Issuer is the bank whose customer credit card is used, keeps the highest amount of profit. 

This is one way, along with this Issuer Bank earn money with more ways as well, like transaction charges, late payment charges, EMI interest charges, Cash withdrawal fees, Over limit fees, Annual fees. 

Apart from this by tying up with many other companies, with a point redeem scheme, there are several ways from which the issuer Bank earns a lot of money.

This is the reason why each Bank wants to be an Issuer Bank in every case. 

This is why the bank wants to give you their credit card.

To become an Issuer Bank, the bank put their staff behind you everywhere, from the mall to your phones and SMS, I mean through all the means of digital marketing.  

They want you to buy their credit card any how. Bank don’t push for anything as much as they push you to get credit card.

You can get an idea of how much the bank benefits by giving a credit card through this thing, that 12.7% of people default on credit card. Even after they are not unable to give money, the bank remains in profit.

Even after this they don’t stop here, they play a variety of tricks with you.

They talk about low cost EMI, rather you are also in loss with it.

Regarding no cost EMI RBI had to issued notice that this is a fraud, that most companies do. Many things are hidden from the customers.

It is deliberately named no cost EMI, you can do it practically.

It is never being called any interest or interest free EMI, because if they had done so, they would have been proved legally wrong in court.

How does No Cost EMI work?

Let us understand How does no cost EMI work with an example of a mobile.

If a customer wanna buy a mobile so the customer has three options:

Option 1:

First is checking rate by going everywhere, and buy from where it is cheaper in price, whether online or offline. 

But the bank doesn’t want that, rather it wants you to use credit card and buy on EMI. The first benefit is product get more sales.

Earlier when a mobile company was earning 10000 by selling 1000 mobile phones, maybe now they start earning 30000 by selling 3000 phones. 

Because the option of EMI increases the purchasing power of the people and they buy more. 

And when the mobile companies earn more, they will share more profit with the bank.

Option 2:

Secondly when you buy something on EMI it works like a loan and you have to pay a loan processing fee, and you are not told that, later when you see the statement it is written in it. This increase the cost of your mobile.

Option 3:

And third thing, the amount of interest is already added to total price.

And as soon as you opt for the EMI option, all your offers are cancelled and in this way the price of the mobile increases.

There is one more thing in no cost EMI option. Firstly, they take the interest amount from you and when your EMI is completed, they return it to you by saying cashback or bonus.

If someone doesn’t take interest from you on EMI then why would he take it first and return you later?. He will not take it from day one, it’s because GST levied it on the interest amount.

And amount of GST also has to be paid by the customer. You will know this thing when you see your statement. But this thing is not told to you and this also increase the price of the mobile.

Some credit card companies give offers and say that there will be no interest for the first 6 months, and will be applicable on the remaining 6 EMIs.

In this case, these people cover their amount by increasing their interest rate.

If the interest rate is 12%, then they will not charge interest in the first 6 month, and for the remaining 6 month, at 24% interest rate is charged.

In the EMI option, you are not able to bargain. In this way you also lose 1000 to 2000 rupees, and interest you have saved, you have to pay double the amount of it.

This is about the case where they are saying that there is no cost EMI.

And where they have said that they will take an interest, there it becomes more expensive.

They keep no cost EMI on old or outdated products which do not sell. There is a simple fact of no cost EMI is Sell more, Sell fast, Sell outdated.

Whether someone should use a credit card or not?

A credit card makes a person feel like he has money. Even though he has no money.

If you watch this carefully, you are buying stuff on credit. 

Now you can also say that what is the big deal here. At least we don’t have to ask anyone for money, and don’t have to take loan.

If we are spending extra money, at least the honour is saved.

When you take a loan from the bank, you take it for very important work.

If you look at your credit card statement, whatever you bought, was it used in an extra emergency? 

By increasing your buying capacity, your habit get spoiled. So that you can also buy stuff which you should not buy.

If there is no EMI option, will so many people buy an iPhone by paying so much money at once?

Due to the option of EMI, whose salary is 30,000 to 35,000 is also buying iPhone. And this get you into the dept trap.

First of all, you buy an iPhone worth rupees 1.5 lakh for 2 lakh by paying more interest. And after that the job you were doing on your own terms, you have to do it under compulsion.

After this, the option of minimum amount is given to you. This is the kind of trap in which if you keep making the minimum payment, so you will keep paying money throughout the year, even then it will not be completed.

Banks want you to miss the EMI, so that their remaining options will also open.

The penalty charge on the late payment is 2% to 3% monthly. If you consider 2%, then 24% of the year. This is too much amount.

If you are late for one day, rather than taking interest on one day, they recharge interest for 45 days.

You must have seen it in old movies, the landlord mortgages the land of the poor and gives money to them. 

He makes them work for the rest of his life, even after that the money is not complete.

The credit card is a landlord of modern times, which if you not used properly, it will get you in big trouble.

Now the question arises how to use credit card in a good way?

How to use credit card in a good way?

A credit card is a very good tool if you used it properly. 

With a credit card, you have to buy only the things whose money you have.

If you buy the product by thinking that you will become rich later.

When you buy products without thinking, you will be stuck in a dept trap.

Suppose you want to buy 1.5 lakh of iPhone. You can also buy it with a credit card.

The money you saved to buy the iPhone, you have to give it later after 50 days. 

You can also use that money as a short term FD, which is for one month.

And with the interest that will get from it, you will be able to reduce the cost of your iPhone.

Whenever you use a credit card, you always have to make full payment.  Don’t get into the trap of paying the minimum amount.

In some cases you should never use a credit card like petrol pump. There 1% service fees and the around 7.2% GST is charged. 

Service fee will refund in some cases, but the GST you have to pay.

When you book in IRCTC, you will have to pay 1% to 2% extra charges. At the time you should never use credit card.

Never use a credit card to add money in digital wallets like PayTm, PhonePe, Gpay, AmazonPay, etc. Because here you have to pay 2% to 3% fee Plus, GST charges.

You should never withdraw case from the credit card. Otherwise you will fall into a very bad debt trap.

You should also never pay from one credit card to another credit card because here you will have to pay extra interest rate and processing fees.

Never use credit cards to pay insurance or LIC premium, because they charge you 1% to 1.5% additionally.

The credit card bills should not be paid by check and cash, because in this case you also have to pay extra charges from 300 to 500 rupees.

When you are buying a credit card, at the time you should careful about some points like which type of credit card you are taking.

If you are using flight one or twice in a year, and for that you are using flight and lounge credit card, it will not be beneficial to you.

If you buy more things from Amazon, then buy an Amazon integrated card, so that when you shop online, you will be benefited.

Another thing is, If you make a late payment, so which card is taking the highest penalty? 

You should compare interest rate, and credit card annual fee. Either it should be very less or it should not be.

Some people even say that it is a free card. So I am telling you there is no fee for the first year, but later they start charging you. So you also have to confirm this too. 

And which bank card you should use, you can decide that by reviewing 20 to 30 products on Amazon and Flipkart, that which bank card is offering more.

The people who are already caught in the credit card trap, and by paying the minimum payment every month they are just surviving. Your credit card bill never end by paying the minimum payment.

You will keep giving money but it will never end. Because it charges high interest which is approx 36% yearly.

If you want to get rid of it, the only way is to either borrow money from a friend and pay it. You  can also take personal loan in order to pay whole payment at once.

Because you will get a personal loan at 14% to 15% that is very less than 30%.

At least the time for which you have taken the loan, will be over, because by paying the minimum payment it will not end.

Any loan you have, whether it is a car loan or a home loan, remember one thing that you have to end credit card first because the interest on credit card is very high.

People Also Ask Some Questions about Credit Cards

What do I need to apply for a credit card?

The Application process for the credit card is same as debit card. You just only have to go to bank and By filling application form, you can get credit card.

How old do you have to be to get a credit card?

18 is the minimum age criteria to apply for the credit card. However, people under 18 can also apply for credit card using their parent’s documents.

What happens if I pay off my credit card early?

Basically it is good practice to make payment of credit card as soon as possible, I mean before the payment cycle end. Most of the people wait for the last day of the credit card cycle, but you will have to pay extra interest at the end of the cycle.

How to increase credit limit?

In order to increase the limit of credit card, you have to call card issuer. I mean you have to call the customer care number mentioned back of the card. If you are Eligible of higher credit limit then they will increase the credit limit.

Which Credit card is better?

Actually all type of credit card works in the same manner, but according to the survey American express is the best credit card company. Because they have good customer care service.

What is a credit card and how is it different from a debit card?

A credit card is a type of digital card, allows you to borrow money from a credit card company, and you will have to pay money back with the interest they have charges.

Whereas a debit card pulls money directly from an associated bank account. It doesn’t enable you to take short term loans.

Conclusion

In this post we have discussed about Various terms of Credit cards like: