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Welcome to the cashless age
Published on Mon, Sep 04, 2006 at 22:03, Updated on Mon, Sep 04, 2006 at 22:10 in Money » Tax section
Tags: Credit Cards, Personal Finance
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Have you entered the cashless age, using plastic money or using your credit to the best effect? Yes, I am referring to ‘credit cards’. Believe me, there is nothing better than a credit card for all those cautious buyers. Shopping has become so easy with credit cards that we enjoy the freedom to move out even without cash.
In early 1990’s, very few people had credit cards since it was quite costly. Now, the scenario is different. Credit cards are available for free and many customers are opting for it because of its convenience.
Some people are still skeptical about a credit card’s usefulness. The first question they would think of is, ‘Why do the banks give 30 days interest-free credit?’ They futher think that there must be some hidden cost attached to it. But do you know how a credit card exactly works? Let me explain this to you with a simple example.
Mr. X holds a SBI credit card and wishes to purchase a home theatre system costing Rs 45,000. He has three options.
- Purchase by cash
- Purchase by taking a loan
- Purchase by credit card
In case of the first option, there is nothing to worry about. It is a straight transaction. In case of the second option, Mr. X will end up paying Rs. 450 interest @ 12 per cent per month. In case of the third option, he will enjoy a credit of more than 30 days, which is without interest. With this, he will also get the benefit of a reward points scheme, run by SBI credit card.
Again, the question remains the same, how SBI card would give an interest free credit for Rs 45,000, when they can earn Rs. 450?
Mr. X has paid some amount for the home theatre system with his SBI credit card (a VISA / Mastercard affiliated card). The merchant swipes the SBI card on a machine provided by another bank, let us assume it's an ICICI Bank swiping machine.
When the merchant swipes a SBI card in a ICICI Bank machine for authorization request, ICICI Bank contacts SBI Card through VISA / Mastercard network. It asks for validity of credit card and the credit limit. SBI card checks the validity of the credit card first. In case of a valid card, it also checks the transaction amount with the available credit limit.
On that basis, SBI Card approves or rejects the transaction received from the merchant through ICICI Bank.
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