Credit cards as a better financial option for smart people

Credit card companies or card issuers (terms like banks, lenders, creditors, and financial institutions are sometimes interchangeably used) often introduce many innovative credit offers to attract more and more customers and to increase the volume of their lending transactions. These offers may vary widely depending on the laws regulating such card transactions, country, etc. Such variations reflect the marketing trends and the level of competition too.

Banks or card issuers (debit cards, credit cards, and even plastic in common parlance) aim at making the maximum sales of their products and thereby to increase their profits, even though some of them offer lowest interest rates or even zero percent interest, often called promotional interest rates, and the balances in such accounts as promotional balances. It is for the consumers or card users to understand the basic rules regarding credit or debit card transactions so that they can avoid penal interest rates for violation of terms on which such low interest rates or zero interest rates are offered.

Very low interest rates -- often 0% or interest free loans -- are offered by card issuers for certain periods or a certain number of statement cycles. They can be on certain sub-balances or the entire balance, only on amount spent on purchases, or even balance transfers used to pay off other accounts. Lenders sometimes offer 0% interest rates for purchase of certain merchandise from some select stores owned by them, or stores with whom they have contracts to boost sales. This arrangement, when used properly, can benefit all, the cardholders enjoy zero interest rates on their purchases, merchants benefit from bigger sales volumes, and the banks are compensated by the merchants for the 0% or low rates offered to cardholders. So, when a bank offers interest free loans, they do not lose money because someone else is paying the interest on the cardholders’ behalf, unless it is a subsidy from the government.

If cardholders enjoy zero interest rates or low rates, they must clearly understand the terms under which such rates are offered. No banks or card issuers can issue zero or below par interest rates unconditionally, or for indefinite periods, because financing has costs. The conditions can be timely payments, use of the cards as specified by the issuers, keeping purchases or payments within the limits prescribed (if any), etc.

Most importantly, cardholders have to understand that zero or low rate interest cards and the credits availed using them are the best financing options available anywhere in the world, for the simple reason that they are mostly with no collaterals. Mostly the credit is offered solely based on customers’ credit rating. If they need loans in the normal course, they must furnish collateral to the lender. There are intelligent and well known smart people who had built up billion-dollar business empires, and even Hollywood film producers who had financed their entire film production costs using credit cards.

Also, there are several thousands of hopeless losers who mindlessly misused credit cards and made themselves liable for unbearable burden of huge debts, and to pay off such debts they had to sell of everything including their homes. So, the key is proper use of credit cards, and abiding by the terms under which cardholders are given such credit facilities. In other words, credit cards can be a boon as well as a curse, and only cardholders make the choice of the boon or curse.

As observed above, the plastic can make or break card users. To avoid pitfalls, before they use credit cards they must understand the issuer’s terms that can be often complex, requiring them to understand the terms of the offer to pay off sub-balances by certain dates. On other occasions, cardholders may be required to pay a certain amount per month (installments) over the minimum due (an ‘interest free’ minimum payment) in order to pay down the sub-balance. On failure to comply with the terms, sometimes card issuers charge interest at normal rates, or even penal rates and retrospectively.

The card issuers use various methods for communicating the balances and rules on statements and they do not usually conform to any standard practices. Sometimes the balances are not always reconcilable with the bank due to unavailability of debit and credit statements on those balances, and even the term ‘cycle’ is not well defined in writing by card issuers. If such ambiguities are noticed, cardholders can always insist on clear terms defining their liability and all other issues. All reputed card issuers provide cardholders with the required information. However, for the US consumers, the CARD Act 2009, signed by President Obama in May, is highly helpful as it makes it obligatory on banks to issue notices on dues, change of terms, change of interest rates, etc. and these become operative this week, though some provisions of CARD Act 2009 will be effective only from 2010.

Cardholders’ account may have promotional balances (low rate, 0%, etc.) and higher-interest balances. Banks may sometimes allocate their payments automatically to any such balances, often in obscure ways. For instance, they may pay off promotional balances before higher-interest bearing balances. This means cardholders will continue to pay higher interest on normal or higher-interest debts or dues in their account until the account is fully paid off. In a way it helps them because if zero interest rate balances are not liquidated, they may become overdue and they may have to pay even penal rates on them. But besides possibly saving the cardholder money over the expected interest rate, it may serve to obscure the actual rate charged by the bank. For example, consumers may think they are paying zero percent when the actual calculated amount of interest on their daily balances is much more.

So, if cardholders want to use credit or debit cards, promotional offers and rates, it becomes imperative to understand the methods and rates that are applied by the banks and other card issuers. Wisely used, credit cards offer an excellent opportunity to finance personal and business financial requirements.