One has seen the latest smart phone or a laptop and the desire is to purchase it right now. Paucity of funds is a problem and one does not know what to do. Buy now spend later is the need of the hour. Credit is the name of the game. It is at this time that one remembers plastic money. A rectangular plastic card with a magnetic strip at the back and the name of the owner printed on the card famously called a credit card. With this card in ones hands all one’s wants can be fulfilled. Time to shop?
What is a credit card?
A credit card enables one to borrow money from the issuer of the card mainly a bank .One pays for a product or a service using the banks money and has to repay these amounts over a period of time .Since the bank pays the amount one does not have to pay right away and can purchase an item even if he has no immediate cash. One has to pay for the use of the banks money which is basically someone else’s money by repaying the amount with interest after a period of time just as in a loan. The bank sets a credit limit which is a maximum amount one can spend on the card. This could be 2-3 times ones monthly salary .It could also depend on the number of loans one is servicing which might impact the credit score. It mainly depends on the debt burden ratio which is the sum total of all EMI’s being serviced divided by the monthly gross salary. One obtains a statement on a monthly basis which lists the number of transactions made as well as the amounts paid using the card .One can pay by submitting the credit card at the cashier and the account is validated by the merchant with the bank .If all conditions are satisfied with the bank such as one is within the credit limit then the transaction is processed and added to one’s credit account. In order to accept credit cards the merchant has to pay a fee to the banks and the bank which issues the credit card collects these amounts as revenue.
What happens if one slides back on his payments?
The idea of using a credit card is all about the grace period. One would not be charged interest during this period. It is advocated that the least one can do is make the minimum payments on the credit card instead of the full amount. The problem with this approach is that the outstanding amount increases until it becomes a severe burden on oneself and his family. This pulls one in a debt trap. If one were to default on the repayments his credit score would be badly affected. Cibil a credit rating agency monitors one’s credit card usage and assigns a score on a scale between 300-900.Too many cards or a consistent late payment might affect this score. One would find it very difficult to avail a car or a home loan if the credit score is poor .When one falls into a debt trap it is not easy to recover. The never ending cycle continues and one can find it very difficult to escape from this vicious circle .Balance transfer is an option which can be explored in order to escape from this cycle of debt.
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