Applying for a Credit Card

Credit card providers will do everything in their power to hook You into getting a credit card. Many attach a free gift or special offer and while that t-shirt of frisbee might look nice now, it isn’t worth the headache that a credit card will ultimately bring you. The most important thing to consider when applying for a card is the terms and conditions, not the free stuff.

Know your credit limits.
Usually credit limits are low when you get you first card. This is a good thing. It keeps your debt manageable, and allows you to start to build your credit score at an early age. Whatever you do, don’t go over your limit or you will pay some hefty penalties. Keep track of your spending.

Remember, promotional rates are temporary.
Just about every credit card offers a promotional rate for a fixed period of time to attract new customers. Do your homework and find out exactly how long, and then make sure you know what the APR will be set at after the promotional rate has expired.

Watch out for penalties and unnecessary fees.
The biggest pitfall with a credit card other than spending too much, is to have unnecessary fees added onto to your balance. These fees are most commonly associated with late or missed payments. In most cases, any missed payment results in a penalty plus a resetting of the APR to the highest possible rate.

My last piece of advice is to keep one card only. The more you have, the more likely you are to use them and confuse them. Keep it simple and good luck.

Read this if you use credit cards

As instances of credit and debit card thefts is on a rise, users need to be aware of the fact that if unreported, the liability on the amount of financial loss on their credit cards would rest on them. However, in the event of the death of the customer and any misuse of the card after that, like what happened in Delhi recently, where two women allegedly lost their lives at the hands of robbers, banks say that they would not go to the customer's family to recover the amount.

"As a gesture we won't go for recovery to the individuals family and I think that no bank will seek recovery in such case," said an official from a private bank on conditions of anonymity. However, banks set customers liable for any loss on card prior to discovery of card loss.

There are however means where the customer can transfer the risk of any financial loss on the credit card. There are insurance covers available with certain cards, which cover the pre discovery fraud loss on credit cards.

Citibank and HSBC offer the pre discovery fraud loss on their cards in partnership with CPP Assistance Services. It covers losses upto 24 hours prior to the notification of card loss.

These are available on select cards and also the cover is only upto several hours before the reporting of card loss," said Harsh Roongta, CEO, Apnaloan.com.

This means that if the cover is upto 12 hours prior to reporting of card loss then if the card is lost at 7 AM in the morning, and he reports the card loss at 9 PM the same day then any financial loss between 9 AM and 9 PM will be covered. Reserve Bank of India has been laying emphasis on banks to provide the pre-discovery fraud loss cover on their cards, said the bank official.

Also, RBI has asked the banks to put in place a system where the system will ask for one additional information that is not available on the card to validate the transaction. "This will make the online credit card transaction secure going forward," said Roongta.

Read this if you use credit cards

As instances of credit and debit card thefts is on a rise, users need to be aware of the fact that if unreported, the liability on the amount of financial loss on their credit cards would rest on them. However, in the event of the death of the customer and any misuse of the card after that, like what happened in Delhi recently, where two women allegedly lost their lives at the hands of robbers, banks say that they would not go to the customer's family to recover the amount.

"As a gesture we won't go for recovery to the individuals family and I think that no bank will seek recovery in such case," said an official from a private bank on conditions of anonymity. However, banks set customers liable for any loss on card prior to discovery of card loss.

There are however means where the customer can transfer the risk of any financial loss on the credit card. There are insurance covers available with certain cards, which cover the pre discovery fraud loss on credit cards.

Citibank and HSBC offer the pre discovery fraud loss on their cards in partnership with CPP Assistance Services. It covers losses upto 24 hours prior to the notification of card loss.

These are available on select cards and also the cover is only upto several hours before the reporting of card loss," said Harsh Roongta, CEO, Apnaloan.com.

This means that if the cover is upto 12 hours prior to reporting of card loss then if the card is lost at 7 AM in the morning, and he reports the card loss at 9 PM the same day then any financial loss between 9 AM and 9 PM will be covered. Reserve Bank of India has been laying emphasis on banks to provide the pre-discovery fraud loss cover on their cards, said the bank official.

Also, RBI has asked the banks to put in place a system where the system will ask for one additional information that is not available on the card to validate the transaction. "This will make the online credit card transaction secure going forward," said Roongta.

Cheap Loans

“Get cash at 0.99% per month interest for 12 months on your card no XXXX 1234. Call 1800 XXX YYY or call on (022) 1234 5678 or SMS CASH on XYZ. Conditions apply from: XYZ Bank.” I recieved this SMS a few minutes ago. Mr Mohan Kumar also received this message, but unlike me he bit the bait!

I must admit that the offer is quite enticing: money at 0.99% per month, that too, from a credit card company. Many of us fall for such utterly misleading advertising. In fact this is a cheap, disgusting way of marketing loans.

Unfortunately most banks believe that this is ethical and do it all the time. They think that consumers are stupid and don't understand the basic mathematics behind this game.

To our misfortune regulatory bodies like RBI, SEBI etc don't seem to have any problem with lenders who fool innocent consumers. In my opinion this is a heinous crime. Here's a dissection of the real cost of seemingly cheap deals.

Money @ 0.99% per month!
This figure amounts to 11.88% per annum and Mr Mohan thought to himself -- his bank was giving him a personal loan at 18%, so naturally this was a very good deal. Mr Mohan is told that this is a reducing balance loan. So, each month he will pay less interest.

This fact is correct but presented wrongly. If the part principal is being repaid each month why should anyone pay interest on the whole loan amount? It is a reducing balance loan and that is the way it should be.

So, so why use it like a punchline or a USP? Let's understand how this loan at 0.99% per month actually works by a layman's calculation.

* Say the loan is for Rs 5 lakh, for a 48-month period, the EMI being Rs 15,368.
* You will totally pay Rs 15,348 X 48 = Rs 737,664 against your loan of Rs 5 lakh.
* That is Rs 237,664 extra as interest over 48 months ie four years.
* That is Rs 237,664 divided by 4 = Rs 59,416 as interest per year.
* Thus Rs 59,416 divide by Rs 5 lakh = 11.88% and thus 0.99% per month.

Things could not be represented more wrongly!

The correct way to do this is to use a concept called Internal Rate of Return (IRR) as it is the IRR, which is the ‘real rate’ the bank is charging you.

Now, let's calulate cash flow for the bank as follows:

Time From the lenders perspective
Time = 0 (now) Rs 5 lakh outflow
Time = 1 Rs 15,368 as inflow
Time = 2 Rs 15,368 as inflow
Time = 3 Rs 15,368 as inflow

Till Time = 48 Rs 15,368 as inflow

In mathematical terms, the IRR of the series of cash flows shown above works out to 20.57%, that's almost 21% pa against the 0.99% per month claimed by the bank!

This is told to you only if you ask what is the IRR or the effective rate of interest.Generally you are never told this. The real cost of this 'cheap' loan is 20.57% pa!

Further more, Mohan was told that to avail this facility he will have to pay only 2% of the loan amount as processing fee and that will be charged in the first statement.

Now a 2% processing fee works out to Rs 10,000. If you account for this amount the bank’s IRR now moves up to 21.72%! So, you take the loan assuming interest rate at 0.99% per month, that is 11.88% per annum when the lender is actually earning 21.72%. But this is not it -- you still need to pay more!

The bank levies a service tax of 12.36% on processing the fee, which it needs to pay to the Government. This works out to Rs 1,236. Factoring this into your cost, increases the bank's IRR to 21.86%.

Further more, you need to pay service tax @ 12.36% on the interest component of your EMI, too. Many banks don't tell you this, and the extra charge turns up in your loan or credit card statement. Now, add this and your cost increases to an astounding 24.56%!

So, the next time you see a loan deal coming your way at say 12% per annum think again. The 'real cost' to you is easily double of that, to say the least. It's worse if you have taken it from a credit card company. The reason: if you forget or delay to make even one payment the bankers will rejoice -- you have a late fee plus about 3% more interest as penalty on the outstanding amount, plus service tax on the above.

No free lunches!
If we are told that the cost of this loan is 25% per annum and we agree to it, then it's fair. What really pinches when we are misguided and information is not correctly and openly given to us.

In this case the bank and its officers via their bonuses, commission and salary, are making money completely at your expense and many a time unethically by not guiding us correctly. To me, this is unfair. But this practice is rampant, and no one seems to have a problem with it. But remember: there's no such thing as a free lunch. And this is especially true in the case of money.

Now, I hope you wouldn't be as careless as Mr Mohan Kumar was.