In my last column I promised that we would look at credit cards. I am now back from vacation. I spent the last three weeks hiking in the Annapurna Mountains in Nepal. It was an amazing and challenging experience and I am very happy to be back. The trip and the experience in the mountains allows me to really appreciate and be thankful for all that we have here in Trinbago, including credit cards. You see, Nepal is heavily cash and paper based. I had to carry lots of cash with me in the mountains or I would have starved. The convenience of having a credit card available both for the buyer and the seller cannot be underestimated.
A credit card is issued to cardholders to enable them to pay merchants accepting the cards for goods and services. The bank creates a revolving account and grants a line of credit to the cardholder. When the cardholder uses the card the bank pays the merchant less any fees and charges and the cardholder pays the bank later on.
A credit card is different from debit card because the card holder is spending his own money and not taking an advance from the bank. When the card holder uses her debit card the bank pays the merchant and takes the money out of her account.
The main benefit to the cardholder is convenience. This is what I really missed while hiking. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a cardholder who need not calculate a balance remaining before every transaction once they do not exceed the credit card limit.
Many credit cards offer rewards and benefits packages.
As Sethi notes “credit cards give you thousands of dollars’ worth of perks. If you pay your bill on time, they’re a free short-term loan. They can help you keep track of your spending much more easily than cash, and they let you download your transaction history for free.
“Most offer free warranty extensions on your purchases and free rental car insurance. Many also offer rewards and points worth hundreds or even thousands of dollars.”
For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorised, regardless of whether the consumer defaults on the credit card payment.
In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees and reduce the amount of cash on the premises.
Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.
Prior to credit cards, each merchant had to evaluate customers’ credit worthiness before extending credit. That task is now performed by the banks which assume the credit risk.
Credit cards can also aid in securing a sale especially if the customer does not have enough cash on hand or in a checking account.
Additional sales are generated by the fact that the customer can purchase goods and services immediately and is less inhibited by the amount of cash on hand or in their bank account.
Merchants are charged several fees for accepting credit cards, including a commission of around one per cent to four per cent of the value of each transaction.
In some cases merchants may charge users a credit card surcharge, either a fixed amount or a percentage, for payment by credit card. This was the case in the bigger cities in Nepal, where we were advised that any payment by credit card increased the amount payable by four per cent.
Thankfully, this is not usually the case in Trinbago.
I am described as a “transactor”, which means that I pay off my credit card in full every month. Therefore, I earn all the benefits without paying any interest or incurring any fees and charges.
The alternative are “revolvers”, those cardholders who actually borrow using credit cards.
Next week we will look at why this is NOT a good idea.
As usual, I look forward to your questions and comments. Please send them to me at smartmoneytt@gmail.com. Take good care.
