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Credit Cards Explained

by orbinside

Credit Card – A Consumer Debt Trap or A Gateway to Luxury

Credit Cards is a consumer loan or debt with luxury benefits. Bank or NBFCs issue Credit Cards as a consumer loan or debt with certain monthly transaction limit based on customer credit score. Credit Card comes with extended payment due date from 30 days up-to 45 days based on the transaction date. Credit limit gets replenished upon the payment of credit card dues every month. Issuer Bank can recover interest on pending dues subject to the issuing terms and customer default.

Credit Cards is a great banking tool which not only act as consumer loan or debt and also serves luxury benefits to its consumers. It depends upon which side of Credit Card you wishes to embrace. It acts as major economy driver by providing purchasing power to its consumers. Credit Cards has something for everyone, be it consumer, banks or NBFCs, Payment Processors, Sponsors or Merchants. It carries credit card account number, expiry date, CVV code, payment processor name, bank or NBFC name, Sponsor Name, in case of co-branded cards.

Credit Cards 5 Pillars or Parties Involved

  • Bank or NBFC: They issue credit cards to customers with certain monthly limits, based on their credit score. Since beginning, Bank issued  credit cards as tool which offers luxury at convenience. Bank offers luxurious offers with credit cards in partnerships with hotel or restaurant chains, flight carriers, airport luxury lounges or club memberships etc. These luxurious benefits are sometime negotiated with parties by banks and sometime are part of packages services negotiated by payment processors. They earn through charging interest on customer defaults and mdr or tdr during transaction swipe by customers.
  • Payment Processors: They offers payment processing facility to banks and pre-set of negotiated luxury benefits. They charge MDR – Merchant Discount Rate or TDR – Transaction Discount Rate to merchants against services offered. They share this MDR or TDR with banks and card swipe machine companies.
  • Sponsors: They use credit card as marketing tool to leverage their products and services. It acts as part of their customer acquisition or brand awareness strategy.
  • Merchant: They also use it as marketing tool by offering or partnering discounts with banks or credit card companies. They get to boost their sale during season and retain sales during off-season in return.
  • Consumers: Credit Card offer them temporary easy debt benefit and luxurious perks or benefits in exchange of its swipe. It boosts consumption power of customers and economy as a whole.

Credit card is a credit game, played between issuers and consumers. Each party is embracing themselves to earn maximise benefits from each others.

We can categorize credit cards customers into three categories from both issuers side and consumers side. From consumer side:

  • Credit Card Revolvers
  • Credit Card Transactors
  • Credit Card Hackers

Whereas from issuers side:

  • Credit Card Revolvers
  • Credit Card Transactors
  • Credit Card Hackers

Credit Card Revolvers

Credit Card Revolvers do not pay their credit card dues on time but pay interest to banks on pending dues. They generally default their payments intentionally or un-intentionally. Consumers never wishes to fall under this category whereas bank love these customers. Credit cards are consumer debt trap for these customers and bank makes income or profit under the credit card segment because of these customers. Bank makes money from all sides through these customers be it earning interest or MDR income.

Credit Card Transactors

Credit Card Transactors pay their credit card dues on time and never pay interest to banks. They manage their cards well. Consumer wishes to fall under this category whereas these customers are dead meat for banks. This does not means that bank does not earn from them. Bank makes money but only earns MDR income from this segment.

Credit Card Hackers

Credit Card Hackers pay their credit card dues on time or clear as on date outstanding as of payment date, never pay interest to banks and maximize the luxurious perks utilization. They manage their cards not just well but excellently. Consumer wishes to fall under this category but it takes extreme measures to be in this category. Bank hates these customers since bank tends to loose money over time due to luxurious perks utilization behaviour. Credit cards are gateway to life for these customers.

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