Wednesday, December 21, 2011

Financial Resolution No.1 for 2012: Stay on top of your Credit Card

This is the first of the series of financial resolutions for the new year 2012. Everyone is making resolutions for the new year and its time we too hop on that train. After all, its a good habit to take sound financial decisions. Isnt it?

So, lets get started!!!

Few years ago, a Credit Card was just a hi-fi piece of plastic that was the possession of just a few rich and powerful people in India. Today, the Credit Card is a part and parcel of life for even the common man. With banks aggressively marketing their cards and offering awesome deals for customers, everyone is tempted to get one and utilize the benefits. Well, it is all not that simple as it sounds.

Have you ever stopped to wonder, why banks are offering so many gifts to make you buy their card? If not, can you just close your eyes for one minute and think "How can the Bank afford it?"

Don’t worry, if you couldn’t answer it. Just read on and you will know pretty soon.

How Can a Bank afford so many benefits & perks along with your credit card?

Well, here is why

1. Every shop/merchant who has a card swiping machine (a Point of Sale or POS device) in his establishment has to pay a yearly fee to have the machine at his place
2. Every time you swipe your card at a shop, the bank retains a small percentage of the amount you swiped as a fee and credits only the remaining to the shopkeeper. This is why some shopkeepers charge you an extra fee if you offer to make the payment via Credit Card (This fee is usually around 4% and varies from bank to bank)
3. Every time you withdraw cash from your credit card, the bank charges a fixed fee of around Rs. 250 or 2-3% of the withdrawn amount as transaction charges. Plus, the interest is payable right from the moment you took out the money. And, the interest rate for cash withdrawals is usually more than purchases and may be around 5% or even more. For ex: If you take Rs. 10000/- from your credit card today and want to repay it tomorrow, you have to pay at least Rs. 10,267 (250 for transaction fee and 17 rupees interest for 1 day)
4. Every time you do not pay your full statement due amount, the bank charges you an interest rate on the whole amount (Usually around 2-3% per month) until you finish the payment
Example: Let’s say you Swipe your card and buy a LCD TV for Rs. 40,000/-. The month end credit card statement says “Total Amount Outstanding = Rs. 40,000/-“. Assuming you don’t have that much money with you and choose to pay Rs. 10000 instead and think of repaying the money as Rs. 10,000 every month, do you think you can repay the whole amount in 4 months? Unfortunately it doesn’t work that way. This is how it will work out.

Balance at the end of Dec 2011: Rs. 40,000/-
Payment made on 1st Jan 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of Jan 2012: Rs. 31,000/-
Payment made on 1st Feb 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000) (See, here the bank doesn’t care if you repaid 10000, they still charge you interest for the full 40000 you swiped)
Balance at the end of Feb 2012: Rs. 22,000/-
Payment made on 1st March 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of March 2012: Rs. 13,000/-
Payment made on 1st April 2012: Rs. 10,000/-
Interest charged by the bank in April 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of April 2012: Rs. 4,000/-
Payment made on 1st May 2012: Rs. 4000/-

As you can see, Mr. Ramesh paid the bank, an interest of 4000 rupees for a period of 4 months for borrowing the 40000 rupees he needed for the LCD TV.

A point to note here is that, I have not considered any further transactions done by Mr. Ramesh on his card during this 4 month period. If he had done so, the bank would have charged an interest of 2.5% on any further amounts he borrowed because, he has not yet settled the full amount and the bank has the right to charge an interest on all outstanding amounts irrespective of the time you swiped the card.

5. If the cheque you pay the bank bounces (by any chance, be it any overwriting in the cheque or a mismatch in signature or for any other reason) the bank will charge you a one-time penalty of around Rs. 500 as cheque bounce charges plus interest on the outstanding amount as explained in point no. 3
6. If by any chance your payment gets delayed and you don’t make the payment by the due date, the bank will charge you a late payment fee of around Rs. 250 plus interest on the outstanding amount as explained in point no. 3

As you can see, there are 5 golden reasons why banks offer such great rewards for getting their credit card.

Important Note:
All the numbers mentioned above (Interest Rates, Late Payment Fee, Cheque Bounce Charges etc. are all indicative numbers and they vary from bank to bank)

After reading the Important Note above, the next question in your mind will be “Where in the world will I find all these charges?

Well, the package that came along with your credit card would have contained a bunch of booklets that say “Card Member Agreements” or “Card Usage Terms & Conditions”. All these can be found in them.

If you were one of those eager card holders, who just ripped the package, picked up the card and all those reward vouchers and threw away the booklets, it’s high time you stopped the practice and visit the bank website for these details. Every credit card issuing bank must display these details in their bank website and also mention them in the monthly statement they send you every month. So, it’s not too late. Just visit your or take some time out to read your credit card bill properly.

New Year’s Financial Resolution No. 1:

Make this your New Year’s Financial Resolution No. 1:

“I will Stay on Top of my Credit Card Spending’s”

Now that the resolution is made, below are some tips that can help you stay on top of your credit card spending’s.

Tips to Stay on Top of your Credit Card Spending’s:

1. Try to use your debit card for all purchases
Reason: It is cash you have and nobody can charge you any fee for it. Spending cash you have is always better than borrowing money to spend
2. Never Withdraw Cash from your Credit Card
Reason: Banks charge a fixed fee per transaction plus an exorbitant interest rate. Withdrawing cash from your credit card must be a last resort option and must be utilized only for emergency situations. If you can afford to wait a few days for the cash, think about borrowing from a friend or a family member or go for a Personal Loan
3. Make your Credit Card bill payment “In Full”
Reason: Paying the full statement amount due is a good habit and the best way to stay away from finance charges
4. Make your Credit Card bill payment “On Time”
Reason: Paying the credit card bill before the due date is a good habit and the best way to stay away from late payment charges. Always give at least 2 days for the cheque to clear. So, if your due date is 5th of every month, make sure you drop the cheque in the drop box on or before the 3rd of the month
5. If you are not able to pay the full statement due amount, pay as much as possible. Do not pay the minimum due amount unless you are in a dire financial situation
Reason: Though the bank is going to charge you an interest on the whole borrowed amount, paying as much of the borrowed money as possible helps minimize the interest you pay the bank. Go back to Mr. Ramesh’s example a paragraph before. If he had paid Rs. 20,000 each month, he would have paid only Rs. 42,000 instead of the Rs. 44,000 he ended up paying.
6. If you are not able to pay the full statement amount due, don’t use your credit card any more.
Reason: If you have an outstanding balance on your credit card, any subsequent purchases too attract interest charges. So, the best idea is to keep your card in your locker until you settle your dues against the credit card in full
7. Always read your statement carefully
Reason: Sometimes bank charge late payment fee or interest rate charges by mistake. They wouldn’t mind such mistakes because; you are the one who is paying the money. So, it is your responsibility to review your statement and call up customer care and have them revert such incorrect fees or charges
8. Always check the Statement Due Date
Reason: Sometimes banks change their billing cycle or the payment cycle. You may be used to making the payment every month on or before the 10th and overlook the fact that the bank changed the due date to the 5th instead of the usual 10th. You may happily drop the cheque on 7th of the month and receive the shocker in the bill which will include a “Late Payment Fee”. There have been many instances like this due to oversight and if the statement mentions a due date, the bank will not accept to revert the late payment fee even if you argue that, last months due date was the 10th and not 5th.
9. If by any chance you have a lot of credit card dues outstanding, think about taking a personal loan and paying them all off in full
Reason: Interest rates on personal loans are currently around 15% or more per annum but the interest rate on credit card outstanding is 2.5% or more per month and it works out to more than 35% or more per annum. Example: If you had an outstanding of Rs. 10000 as of Jan 1st 2011, and paid just the minimum balance every month, the interest amount alone would amount to nearly Rs. 3500/- which is nearly 35% of the amount you borrowed. A Personal Loan is definitely much cheaper than this. Isn’t it?

If you are an impulse spender who just buys stuff as when they want, the best option is to use your debit card and keep your credit card locked away to ensure you don’t mess up your financial situation.

Happy Saving & Less Spending this New Year!!!

Sensex is no longer a Trillion Dollar Market

At the outset, I am really sad to write this article, but unfortunately the reality is that the Indian Stock Market (BSE-Sensex) is no longer a Trillion Dollar Market.

Before we proceed any further, some of you may ask, "Was India a Trillion Dollar Market?"

Oh YES. India was a member of the elite group of country's whose market share is over a Trillion US Dollars. The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007. It was a historic landmark, but about a year later on July 1, 2008 it lost its tag of "A Trillion dollar market". However, India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009. The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past; first in early 2008 and then at the beginning of 2011 when our Market Size was as high as USD 1.9 trillion.

What is a Trillion Dollar Market?

A Trillion Dollar Market is one, where the total value of the shares listed in the exchange (Market Capitalization of the Exchange) is worth over 1 Trillion US Dollars. This is calculated by taking the Market Capitalization of every single share that is listed in the exchange and summing them all up. The value in terms of Indian Rupees is then converted into US Dollars at the prevailing exchange rate and the Market Value in US dollars is calculated.

1 Trillion USD at todays exchange rate = Rs. 52800000000000. Dont try to convert this into words, this is over 52 lakh Crores Indian Rupees

Note: 1 USD as of End of Trading Day 20th December 2011 is 52.801

Why did this happen?

The causes are many fold

1. Global Economic Scenario - The Economic Scenario world over is very volatile and as a result stock markets world wide have lost significant ground. The Indian market is no exception. The Indian Stock Market (BSE Sensex) closed at around 15175 which is nearly 2000 points down from what the Sensex was last year in December. (Sensex was around 17000 points in December 2010)

2. Foreign Investors (FII's) Pulling Out Funds - Again, this is a direct result of the previous point "The Global Economic Scenario". Due to turbulence in the markets world wide, foreign investors have pulled out lakhs of crores worth money from the Indian Stock Markets, which has not helped the Indian Markets.

3. Local Investor Sentiment - Again, this is also due to the "Global Economic Scenario". Due to the turbulents in the markets world wide, Indian Investors have panicked and begun selling off their investments and moving over to more secure investments like Bank Deposits, Gold and Real Estate. This coupled with the FII's pulling out funds, has made the BSE Sensex tank over 2000 points when compared to the same time last year (December 2010)

4. Indian Currency Depereciation - As you may have read in my previous post Is the Indian Currency Rupee Depreciation against the US Dollar Good or Bad? the Indian Rupee has depreciated significantly against the US dollar over the past few weeks. Just 6 months ago, One USD was worth around 45 Indian Rupees and now it is worth more than 52 rupees. Though the Indian market capitalization in terms of rupees has fallen, the fall in value of the Indian Rupee has further aggravated the situation because, the market capitalization has to go up by a further 7 rupees to catch up every dollar to meet the 1 Trillion Mark.

What is the Current Market Capitalization?

As of 20th December 2011, the Market Capitalization of BSE Sensex was Rs 5260441 crores. As you can see from just a few paragraphs away, the total market cap must be atleast 5280000 crores in order to touch the 1 Trillion Mark.

Will the Indian Market Regain the Prestigious 1 Trillion Dollar Tag?

Yes. This is not the end of the road. The Indian Stock Market has lost over 20 lakh crores (2000000 crores) over the past year. If you add this to the current market capitalization of 5260441 crores we get over 72 lakh crores and that is more than sufficient to regain the Trillion Dollar Tag.

Due to the year end bull run (Yes, this happens almost every year. During christmas & new year, markets worldwide go through a rally that see's a hike in market value due to the holiday sentiment) which may happen this year too, if the stock market regains around 500 odd points, I am sure the Indian Market will regain its tag of "A 1 Trillion Dollar Market".

Lets keep our fingers crossed and hope for the best.

Happy Holidays Everyone!!! Lets hope that the New Year will bring in good news for the markets worldwide and bring a smile in the face of every investor!!!

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