May 03, 2001 06:46 PM
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It is important to understand the business model of the card issuing company as this comes from the customers i.e. us.
The credit card companies have three income streams.
Firstly, the processing costs and annual charges add to a card company’s topline. The aim here is not to really make money, but to discourage non-serious / low card users because a number of such users means idle infrastructure for the issuing company.
Secondly and more significantly, the issuing company charges 2.5% to 3% service charges from the merchant establishments. So, the higher the spending on the cards, the better it is for them.
Thirdly and most significantly, their income comes from the delayed payments / part payments. On the delayed payments, there is a late payment charge. In addition, interest @2.5% to 2.95% p.m. is charged. The catch is that this interest is charged on not only the part not paid, but also on subsequent purchases, till the entire outstanding amount is cleared. To illustrate, consider this example:
A person spends Rs.10000/- but pays only Rs.1000/- and then spends Rs.3000/-. So, the interest gets charged on Rs.10000-Rs.1000+Rs.3000= Rs.12000 and subsequent purchases till this Rs.12000/-+ subsequent purchases are paid for.
So, the secret to avoiding this debt trap is to make your card payments within the due date.