Chapter 5 – Credit and Debit Cards

CREDIT CARD

A credit card is a thin plastic card, that contains identification information such as a signature, and authorizes the person named on it to charge purchases or services to his account – charges for which he will be billed periodically.
The information on the card can be read by ATMs, Point Of Sales (POS) Terminals at different establishments like Super Markets, Showrooms, Book Shops, Restaurants etc.
The concept behind Credit Card is “Buy Now, Pay Later”.
Credit Cards are plastic cards that can be used in lieu of money for payment of goods/services and also enable withdrawal of cash if needed.
The payments made through the card or cash withdrawn have to be paid after a certain agreed period of time and also with a payment option spread over a period. The process starts with the usage of the card and ends with the payment of card dues.

Type of Credit Cards

Mainly credit cards are issued by banks in two formats viz., the proprietary format and the co- branded format. In the proprietary format, banks issue the card in different brand names like Classic, Silver, Gold, Platinum, Titanium etc., Credit limits, cash withdrawal limits and other facilities will depend on the type of card.

In the co branded format, banks tie up with service providers like Hotels, Oil Companies, Airline Companies etc. and offer the cards as a co branded product with the brand name of the tied up company also embossed in the card. This enables brand recall and results in better utilization of the products offered by the tied up product. Special incentives/reward points are offered for using the co branded card.

Salient features of Credit Cards

Credit Cards are accepted globally through their affiliation with Visa and Master Card.
Credit Cards are issued with limits of usage called “Card Limit” which fix the upper limit upto which the cards can be used. Within the overall limit, limits on cash withdrawal through ATMs are fixed which will be equal to or less than the total card limit. While the overall limit can be used at any point of time without any charges, for withdrawal of cash finance charges are recovered depending upon the frequency of withdrawal
Credit cards have a regular billing cycle and billing date and due date of payment is decided from the billing date. The period after which payment is to be made after the billing date is called as the free credit period and will be usually between 20 days and 50 days and differ across banks.
To induce usage of cards, reward points are awarded based on the amount and type of usage. Reward points vary for different classes like Silver, Gold, Platinum, Titanium etc., The reward points will be awarded based on the usage and will be a fixed points per Rs.100 and the total reward points for the usage will be based on the usage and calculated per Rs.100. The reward points can be redeemed by the card holders as prescribed by the card issuing bank.
The concept of “Cash Back Offer” is introduced in credit cards to promote more usage. The incentive is offered from 2% to 10% and adjusted in the payment. Cash Back Offer always comes with a cap on the total amount.
The payment for the usage of the card after the credit period and on the due date can be paid in different ways. The payment can be made in full on or before the due date. Alternatively, a minimum of 10% of the outstanding amount can be paid every month on due date. The third option for payment is to convert the outstanding amount into a loan and repay the same in equated monthly installments (EMIs).
Charges for late payment beyond the due date is collected as late fees and generally varies from Rs.200 to Rs.500.
Cards are issued with photos also as add on feature.
Liability for the card holder in case of loss of cards is limited to a small amount in case of most of the credit card issuers. Usually the liability is restricted to Rs.1000/- (Rupees One Thousand Only) and the balance liability if any is borne by the card issuer through an insurance protection. Liability for lost card can be controlled from the time the loss is reported to the card centers which operate on a 24 hour basis.
For online purchases using credit cards, additional password protection just like PIN for ATM transactions can be secured with special security features.
Some banks offer free personal accident insurance cover for the card holders ranging from Rs. 1 Lac to Rs. 10 Lacs depending on the type of card.

Credit Card Issuing Process

Issue of credit card involves the following processes.
Obtaining an application from the prospect.
Processing the application.
Analysing and arriving at the Credit Score.
Decision on the type of card to be issued.
Issue of Card & PIN Mailer
Dispatch of Card & Acknowledgement of Receipt.
Card Operations.

Important Terms in Credit Card Operations

Joining Fees & Annual Fees: Joining and Annual Fees are charged at the time of issue and at the end of every year respectively and varies with the type of card. Charges:

Finance Charges is applicable if the card member deposits part of the Total Payment or the Minimum Amount Due. The balance outstanding amount payable shall be carried forward to subsequent statements. The amount attracts finance charges on entire outstanding including fresh purchases and other bank charges till the date of full and final payment. Finance Charges on cash advances are applicable from the date the card holder incurred the transactions until they are fully paid. Finance charges are calculated on a daily basis at the end of every day based on the current outstanding balance of the customer.
Minimum Amount Due – Minimum Amount Due (MAD) is calculated by adding New Debits for the month, previously unpaid payments and other charges. Minimum amount also includes the amount by which the card holder exceeded the card limit. Minimum Amount Due every month shall be higher of the following:
- 5% of the statement outstanding or
- Sum total of all installments billed, interest, fees, other charges, amount that is over limit and I % of the principal or
- 250/-. In case of default or if the statement balance is less than Rs.250/-, the entire outstanding amount has to be paid.
- Minimum Amount Due is intended to generate more revenues for the card issuer as it will prolong the repayment and interest will be charged at exorbitant rate for the balance amount.
Maximum Interest Free Period: Maximum Interest Free Period is the period for which no interest is charged for the card balances subject to the condition that there are no outstanding previous card dues. The period depends on the type of card and may vary from 20 days to 50 days depending on the card issuer. This is applicable only on retail purchases and if previous month’s balance is paid in full. Interest Free Period does not apply for Cash Advances and Revolving Balances.
Annualised Percentage Rate (APR): interest will be charged for the unpaid balances as on the due date and also subsequent purchases. The interest rate was expressed as a monthly percentage rate previously to reduce the impact of high rates when calculated on an annualized basis. But RBI has advised banks to clearly mention the interest rate on an annualised percentage rate. The monthly interest is annualized