Second Post of the Series - Let's talk about the F- Word - Finances
Psychology suggests that the quickest way to feel in with an individual or a group is to mirror them. You get acquainted with their slang, accent and you are on your way to become accepted.
On that note, let me introduce you to some terms used in personal finance that would be relevant as you continue reading this post.
You might have come across a few or all of them in your interactions, yet go through these again, as a palette cleanse.
Bank Balance: The amount that you have it in the bank
Cash: The money that you carry around in your wallet and have it at home
Loan: The amount that is borrowed from a bank or a lender institution
Interest: It can be understood as rent paid on the money that you have borrowed
Due Date: The date on which the loan becomes due, that is, needs to be repaid.
Outstanding amount: The part of the loan that is with you and is yet to be re-paid
Point of Sale: Where you pay cash or use your card to pay for your purchases.
Let me start with a little story.
In my first job, my teammate had three credit cards. Fancy! But little did I know they used each card to pay off the bills on each other. This became their thing, and an ongoing battle. Every month the fretting increased – the salary never seemed to be enough. While I do not know how of this story is true, but many around thought it was extremely cool!
In case of credit cards, the word is divided if credit cards are useful or not. While the verdict is not out, knowing more about debit cards and credit cards would make it easier to make an informed choice.
Let’s dive in.
Assume there are two shops in your locality – Shop A and Shop B.
In both cases, you have your purchase when you walk out of the store.
But when you buy from Shop A, you pay before check-out so you are out of INR X immediately. While, in the case of Shop B, you do not pay during check-out and you have time till end of the month to pay the bill.
The transaction that happens in shop A is similar to that of debit card – when you swipe the debit card – money from your bank account gets paid to the shop owner. It is equivalent to paying using cash without the hassles of actually carrying it.
Those transactions with Shop B is similar that of a credit card – When you spend using a credit card – you do not spend from the cash or bank balance you have at the moment. Your banker steps in and pays for you, and later collects it from you.
While the functions of shop keeper B do not exactly denote a bank in this example, but it is to note the familiarity.
This comes in the shape of credit card that speaks on behalf of you and the bank.
How does a bank/card issuer ensure familiarity?
Apart from the basic ID documents, a credit card is always issued where the bank has a hold on you. They can either base it on
a regular income, or
the fixed deposits that you hold with the bank, or
a hefty bank balance
the banks also take into account your credit score.
The bank will also specify the maximum amount that you can spend and mention timelines of billing and payment.
When your bank gave you a credit card with the conditions that you cannot spend more than the amount specified – it is called the credit limit.
The date before which you need to pay the bank so that you do not attract interest is called the due date or payment date.
The time period between which the bill is generated is called billing period and the last date of the billing period is called billing date. The bill value would take into account all purchases you made during the billing period is the amount due.
The time between billing date and due date is called the grace period or the interest-free period. This is the cushion time that the bank offers you for using its service.
Decoding Credit Cards
Consider the month of April. The bank has just issued you the credit card, and given the norms that anything you buy between April 1 to April 30 will have to be paid on or before May 20. The amount cannot exceed INR 10,000.
Defining the ‘normal’
Through the month of April, out of the credit limit, you have utilized INR 4,000 and on April 30 your bill gets generated for the amount.
On May 1, the amount you can spend through your credit card does not increase to INR 10,000. You are at a liberty to spend INR 6,000 from the card.
You pay off the bill amount on May 10, assuming you made no purchase on your credit card between May 1 to May 10, you have the entire INR 10,000 at your disposal.
In other words, you cannot spend more than the limit set by your bank.
Exhausting the credit limit
By April 25, you use up all of INR 10,000, let’s assume. So, from April 25 to the date that you repay your money, your transactions will be rejected. Partial repayment can also be done, but entire billing amount must be repaid before May 20 if you do not want to attract interest.
The credit limit is similar to a bucket filled with water. The size of the bucket doesn’t change. If you use the water, you would need to refill it to use again.
To know how credit card interest is calculated and understand more about the fees and charges – do check out the blog posts below