How credit cards work in India and why you should use them

I remember applying for my first credit card on Day 2 of my job after college. ICICI bank at the time had a black, platinum credit card that they were offering.

The guy however told me to come back after three months – they needed three salary slips from my current employer as I was not in Infosys or Wipro (guys at these companies got credit cards on the basis of  their offer letters).

I did, and had my first credit card finally. Good decision too — as six months later, I had quit my job and started a start-up (sounds funny now) – and no bank would give me a credit card then.

This was back in 2007.

Almost ten years later, even after the demonetization thingy, there are quite a few folks who are just getting a credit card and even then, are super hesitant to use it.

There are many bits of misleading information doing the rounds due to which people shy away from getting one – or using one if they have it.

I hope that after reading what I have to say, you will be more inclined to get a credit card or start using the one you already have.

Why credit cards make sense

Credit cards are by far, the safest way to make purchases – primarily because the entire channel is validated. The merchant who is accepting credit card payments is approved by a credit card company and also has to maintain a deposit with them.

Here are some reasons why paying via credit cards are a no-brainer.

Buyer Protection

In today’s world, buyers have extremely strong protections.
Even if you buy something from an extremely untrustworthy website (and I have on occasions) and your goods don’t arrive — all you need to do is call your credit card company and file a dispute.

They will open an investigation and if they find your claim to be true, the money is returned back to you.

Depending on the credit card company, you will have somewhere between 30 – 60 days to file this claim.
While the claim is in process, you (mostly) do not have to pay the money to your credit card company.

Which other mode of payment gives you this level of security? If you pay via debit cards, the money is gone from the bank and very often, there is very little the banks can do to help.

Theft Protection

Most of the good credit card companies will have some sort of theft protection which they offer because they have their own insurance.

If you are on a trip abroad and your wallet gets flicked and the thief buys stuff with your credit card, the credit card company will waive this off provided you notify them of the theft within a day or so.

The onus on verifying the card is with the merchant and when this happens, the card company will mostly just pull the money back from the merchant.

So, you are absolutely safe. Imagine this happening with stuff like cash or debit cards.

Reward Points and other offers

Almost every credit card company will offer you some sort of reward points for making transactions on them. They are able to give you reward points because they charge the merchant a transaction fee when you swipe your card. This is generally between 1 – 3%

Personally, using reward points accumulated, we have flown to places free of cost and stayed at 5 star hotels for free.
(Long story short, if you spend around 5L on an American Express Platinum Travel card in a year, you would have flight tickets worth 10K and a Taj Holiday voucher worth 10K in addition to having some more points to spend).

Lots of credit cards will also give you free movie tickets every month and other benefits like hotel and restaurant discounts on top of reward points.

As a customer, you have not spent anything additional – but have reaped benefits. So, why wouldn’t you do it?

The actual credit

If you plan your purchase correctly, you can get upto 50 odd days of credit on something you just bought. (For example, if you buy something on Day 1 on your credit cycle,  you have 30 days of the month and an additional 20 days of the following month to make the payment).

If you have just bought flight tickets worth Rs. 1L, and kept the money even in a fixed deposit (giving you 6.5%) and pay the bill after 50 days, you would have made around Rs. 800 — which is essentially free money.

Keep track of your expenses in one place

The credit card statement at the end of the month lists down all your expenses in one place. You have to maintain this yourself if you use cash.

How credit cards work

Behind the scenes, when a merchant swipes your credit card and you put your PIN number in, the credit card company informs the merchant whether you have enough credit available in your account.

Till this point in time, no money has actually transacted.

The merchant then needs to ‘collect’ the charge at the end of the day (usually).
So, if there is an issue with your product or anything,  the merchant can simply cancel a transaction even after you have put your PIN in and received the payment SMS.

In some cases, the merchant will simply not collect the charge and after 7 days or so, this gets automatically refunded.

You do not pay the amount for an un-collected charge – so you are protected at that point as well – incase the merchant runs out of stock or cannot procure the goods for your order.

Plus, due to the merchant requiring to keep a deposit with the card company, it is much easier to reverse a charge and get your money back.

And in the worst possible situation in which the merchant disappears after taking your money, the credit card company has insurance and you will rarely need to pay anything for a bad transaction.

Still with me? Awesome!
Next section contains tips on picking out a credit card.

Tips on getting a credit card

Salaried vs Business

I have found that it is much easier to get a credit card if you are salaried versus if you are a business owner. Especially if you are a new business owner – some banks may still offer you a credit card, but with a lower credit limit.

So, if you are in a job and plan to quit soon, make sure you get a couple of credit cards before you do so.

Credit cards attract more credit cards

At one time, I had over 7 credit cards from different banks even when I was doing my startup simply because I had an existing credit card.

Most credit card applications will ask if you already own a credit card and if you do, your chances greatly improve on getting a new credit card.

However, having many credit cards is generally not recommended as it affects your credit rating (CIBIL).

Free versus Paid

I have found that the paid credit cards offer a much higher value.
Sure, you don’t pay anything for a free card — but then you don’t get back much as well.

For example, an ICICI bank Rubyx card which costs 3,500 bucks to get gives much better points conversion than the free card they offer. In addition, you get stuff like airport lounge access (each access costs Rs. 1,000 if you pay for it) and the starting bonus is a pair of Sennheiser headset worth 3K.

So, overall, I would highly recommend getting a paid card if you can afford it as the payback is significantly higher if you move all your purchases to the credit card.

How many cards should I own?

I think you should have 2 credit cards to be really safe. Try to get cards from different providers.
For example, you should try and get an American Express and either a Mastercard or Visa.

Not all stores accept American Express even though it has great benefits – hence you need a supplementary Visa or a Mastercard.

Get supplementary cards for your spouse / family

It makes sense to get supplementary cards for your spouse rather than getting them a separate card as the points add up on the same account for all supplementary cards.

You may have lower limit overall (because the limit is shared between the cards) – so it makes sense to get 2 different cards with 2 supplementary ones for the both of you.

Things to watch out for

Paying bills on time

Most credit cards will want you not to pay the entire amount by the due date.
The balance amount left is shown as a personal loan and the interest rates can be brutal – 2.5 – 4% a month (i.e upto 48% a year) on the remaining amount.

The only way you can use a credit card to your advantage is to always pay the entire amount by the due date.

Never get into credit card debt. Not only will they take you to town with their interest rates, your credit rating will also be hit.

If you can’t afford to pay for something a 100%, you should probably not be buying it.

International transactions – 1

Most international websites will not have an OTP mechanism. So, payments go through just by giving your CC number and CVV + expiry date.

If you do not see yourself buying anything internationally, it might be worthwhile to call the bank and ask them to block all international transactions on your card even if your card is international by default.

International transactions – 2

Remember that your credit card company will charge around 3 – 3.5% as currency conversion fees when you spend on anything in foreign currency. So keep that in mind while doing transactions.

International travel

If you happen to travel out of the country, it makes sense to call your credit card company and inform them on the dates and countries of travel. They generally add a note to your credit card asking their fraud prevention team to allow international transactions.

Once, my credit card was blocked while I was billing at an Apple store in the US leading to an embarrassing situation.
(Ironically my debit card worked and I was able to complete the purchase)

Never withdraw money from the ATM

Most credit cards will allow you to with draw some small amounts of cash from any ATM – around 10 – 20K depending on your limits.

The credit card company will show this as a personal loan and charge between 3 – 4% interest per month on the amount.

So unless you are in a bad situation, always avoid doing this even if convenient.

That is about it! Happy credit card shopping!

I hope this post has been helpful and if you have any questions, please put them in the comments and I will definitely help you out.

Why eCommerce is eventually going to eat up all brick and mortar businesses in India

I recently bought a mattress for our guest bedroom. My first offline purchase in many months. A mattress is something that you need to touch, feel bounce on before making a purchase. And hence, we went to a nearby mattress place and after checking out a number of options, settled on one.

We could have easily walked out and purchased it online – but my conscience wouldn’t let me. So we made an order.

The guy asked me to pay half the amount as advance — in cash. I did.

What followed was a series of back and forth – calling the guy, checking with the delivery schedules. Canceling plans to wait at home and the delivery not showing up.

What was promised to be delivered on Monday, was delivered after a lot of following up 4 days later.

Worse was that the guy refused to give me a legitimate bill. He made excuses. He finally told me that his CA was away and when we will be back, he will issue me a tax invoice. I paid the entire amount in cash. After having such a tough time just getting the goods delivered, it would be foolish to follow up on a bill.

That’s where I think eCommerce really shines for me.

Not having to deal with another human for purchasing something

You look up things online. The marketplace makes prices competitive – removing the entire point of haggling. You click a button and the goods are delivered in a timely manner with all legalities in place. Without ever speaking to anyone.

Hell, you can even start your own store, use Shopify to setup your shop and your domain (Shopify offers domains) – and start selling your own goods. All without speaking to anyone.

Technology keeps people honest. It keeps the contract binding.

I think that is the most important aspect for me and many people like me. And that is why I think eCommerce will eat up all the brick and mortar businesses in India. It is not simply because eCommerce is painless (which it is) – but brick and mortar businesses are, as a friend put it, hitting their foot on the axe!

This blog was originally posted on my LinkedIn Account.