Have you ever run into a situation where you find your current outstanding dues on your credit card suddenly overwhelming? Do you wish you had better benefits on your card? There is a way out which will give you more time to pay off the dues and also get rid of your current credit card. Balance of Transfer facility is the answer.

What is `Balance of Transfer’ ?

It is facility offered by credit card issuing companies to card holders wherein the outstanding balance on the credit card can be transferred to a less used card or a new card. Banks provide incentive for customers who use balance of transfer by providing a low interest or interest free period.

When an individual opts for balance of transfer, the less used card or the new card from which the facility is being used will lower the credit limit proportionately to the balance transfer amount. So if your credit limit is Rs. 100,000 and you have opted for balance of transfer to the tune of Rs. 40,000, your credit limit will be reduced to Rs. 60,000. Also, balance of transfer limit cannot exceed 80% of the credit limit.

When is it useful?

• High interest rate charged: If individuals face a situation where the interest rate charged by a new credit card is lower than what is charged by the current credit card, interest cost could be reduced by transferring the outstanding balance to the new credit card.
• Dissatisfied with the service: For those individuals, who are not content with the service provided by the current credit card company, due to various issues such as improper billing, non receipt of bill among other things, can opt for balance of transfer. The individual can transfer the balance of such a card to another card and get rid of the old card.
• Inability to finance the debt: If an individual has a high outstanding balance on a card and is unable to finance it currently because of short term liquidity crunch, or if the individual has an exorbitant debt to pay off, balance of transfer can come a temporary relief.

Charges involved

In order to induce customers, banks offer low rate of interest or sometime even zero interest on balance transfer for around specified period. What is noteworthy is the fact that these attractive rates (zero or low rates) are valid for only an introductory period i.e. 3-6 months, post which the bank will start charging you the normal rate of interest. A processing fee is also levied by banks which can be in the range of 2% and 5% of the total amount.

Let us take the example of Bank ABC which offers two plans for balance of transfer:

1.    Transfer at 0% interest rate for 3 months, 2.95% interest rate after the 3^rd month and 2% processing fee or Rs. 199 whichever is higher.

2.    Transfer at 0.75% for 6 months, 2.95% interest after the 6^th month and 1% processing fee or Rs. 100 whichever is higher.

The process

Inform the credit card company to whom you would want your outstanding debt to be transferred to.

• Fill in the form provided by them with details pertaining to your old credit card along with a copy of your latest credit card bill and submit it.
• Within 7-10 working days, the credit card company will send you a demand draft (DD) which will have the name of your old credit card issuer on it. After having submitted this DD to your old credit card company, your outstanding debt gets cleared with them and the same will be transferred to the new credit card issuer.

In order to make the most of the balance of transfer facility, make sure you make the maximum payment during the low interest or interest free period so that your finances are not impacted when the interest rate kicks in. More importantly, note that moving from one card to another is provides you with temporary interest relief. Also, do remember any purchases and expenses on the card on which you have opted for balance of transfer will not fall under the low or zero interest purview.

A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market. Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens.

Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

How does the process work

You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.

The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty was earlier levied by the existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. However recently  NHBs and some banks like ICICI and SBI have waived this fee, but some banks could still charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and NHB mandate clearly are not in favour of penalty for prepayment in the case of a floating interest rate loan. Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high interest rate regime.

This can range anywhere between 0.5% to 1% of the loan applied, most banks restrict this amount to Rs.5000.

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25% to 0.75%. More hikes are expected after the RBI monetary policy review slated for the end of January.

Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank  etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.

Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.

Service issues: Sometimes you might just be unhappy with your bank’s service and accessibility, which might prompt a change.

Things to watch out for:

-        It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.

-        In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.

-         Get a statement from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.

-        Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc.

An accurate understanding of one’s financial well being is of utmost importance at every stage of life. So, whether you are a student, fresher into the job market or a veteran - assessment of personal financial health is important in order to make good financial decisions. For example, purchasing a car, purchasing a home, taking a student loan, liquidating an investment or making a risky investment  – all these decisions can be made only if you know your financial status well.

An individual’s financial health is computed by means of his personal net worth. In simple terms, personal net worth is the net asset value of an individual. Personal net worth is calculated as follows:

[Total Assets] less [Total Liabilities]

One must assess his / her net personal worth on a regular basis. This is because corrective measures can be taken in time if the net personal worth starts declining. It is much easier to recover at early stages than once you find yourself in deep financial crisis. Your net personal worth will also give you an idea about how financial institutions perceive you as a borrower.  For example, Deepak, an IT consultant with a software company wants to purchase a car. He has set his eyes on the Toyota Corolla. The car dealer informs him that the on road price of the car will come to Rs.11.25 L.  If he takes a car loan, he will have to pay a monthly EMI of Rs. 15,000 towards repayment of the car loan and pay an amount of Rs. 1.0 L as down payment. Deepak’s monthly salary is Rs.0.9L and the EMI as well as the down payment seems easily affordable. However, Deepak should assess whether he can afford to buy this car at present by considering all his liabilities and assets. His personal net worth should give him a fair idea of his current financial status and whether he can afford to buy the car.

Computation of Deepak’s personal net worth

Assuming that Deepak’s monthly outflow towards EMIs of outstanding loans is Rs. 35,000/- and looking at his personal net worth, a corolla is a viable option. This is because he has a positive net worth of Rs.18.73 L. Further he is able to make payments of EMIs with ease considering his current income and should also be able to pay the EMI on the new car loan.

Note that knowledge of current personal net worth is essential to make financial decisions. It is important to reevaluate personal net worth while making any important financial decision as the value of assets and liabilities is likely to change. Also, net worth should not be considered in isolation. It is a good idea to consider factors like current and future income levels, future liabilities etc. For example, if Deepak has to bear the expenses of his sister’s wedding which costs him approximately Rs. 9 L and he has to sell off some of his investment to meet the wedding expenses, his personal net worth will look different. Further, if the market value of assets declines, his personal net worth will also take a hit. Let us take a look:

Deepak’s Personal Net worth is he has to bear his sister’s wedding expenses and the economy takes a down turn:

Clearly, in the above situation, Deepak should not purchase a car at present and should concentrate on improving his personal net worth.

Sometime ago, the competition commission of India (CCI) imposed a penalty of Rs. 630 crores on the largest real estate company of India, the DLF. This was hailed as a landmark judgement. CCI is an institution created to ensure that no institution or company exploits its dominant position to create a monopolistic situation in the market by unfair means. CCI has taken a serious stand against DLF and termed the violation as the “grossly abusing its dominant position”.

What was the issue?

There have been complaints against real estate developers over the last couple of years on incomplete projects, delays in possession, and in some cases, irresponsible responses to critical situations. This has left home buyers confused and exasperated. Some of the affected home buyers lodged a complaint with CCI regarding a project undertaken by DLF. The project was supposed to be completed in 2009 but even after 2 years past the stipulated timeline of 2009, the status was not clarified according to the home buyers.

The second deviation that buyers indicated was that of DLF indulging in increasing the number of floors. This has resulted in more number of apartments in the same area. This is very common to many developers who promise something but deliver a completely different product.

Apart from these violations, there were many terms and conditions, which were unfair to the home buyers. For example, buyers will have to pay a high interest rate if buyers delay payment while DLF will pay a negligible amount if they delay possession. This condition is termed the punitive penalty clause by builders.

What this means is that if the buyer delays the payment they will have to pay with an interest rate. For example, if the buyer is supposed to pay 1L by December 28^th, 2011 and delays, he will have to pay 15% charges per annum on this amount. While if the builder delays giving possession of apartment, he doesn’t pay much penalty.

The CCI, in its judgement, has also clarified that they can issue penalties against other developers if found guilty on similar violations. This has opened up other cases as well and CCI is actively looking into such cases.

Implication for home buyers

This significant judgement by CCI will have larger implications for the home buyers. DLF, in its response, said that these are industry practices and hence they cannot be singled out. Essentially what this means is that the judgement can be used by home buyers who have been forced into similar situations by other builders.

Home buyers can go to CCI for situations where builders have increased the number of apartments than what is promised originally. They can also question the builders on changing the super area and charging extra.

Home buyers can question the exit clauses for them and for the builders. The exit clause is usually not in favour of the home buyers. In the case of DLF, the exit clause gave unprecedented right to DLF to exit without providing adequate compensation to the home buyers. Not only this, buyers can question changing any clause which puts them at an unfair disadvantage.

What is next?

After this judgement, CCI has been studying other cases where such violations have happened. Since DLF has made it clear that these are industry practices, CCI is conducting a thorough check on builders who follow the same practice. This will provide relief to home buyers who have not got their units as promised.

There is another regulation to be discussed in the parliament very soon. The real estate authority bill envisages far-sweeping changes in the real estate industry. This regulation will enforce transparency in real estate dealing, reduce unaccounted for transactions, enforce accountability and sanctity of contract, and ensure that home buyers are not taken for granted.

Together, with real estate authority bill CCI judgement against DLF will have a big impact in the realty segment. This will encourage serious players in real estate, discourage unscrupulous practices, and attract foreign players which will help the industry as a whole.

One of the key aspects of creating a successful financial plan for a year is to establish a workable home budget that deals with your expenses, manages your debt and also builds your savings at the same time! A home budget can be defined as a plan that pre-determines your spending goals, spread over a certain period of time (in this instance, 1 year).

your income and cash flow

To chalk out a workable home budget, your income is the first thing that you need to consider. It must include all forms of income that is being received by you, like your pay cheque; interests and dividends that you earn from investments; tax refunds and gifts too. When you are calculating the “Cash Flow”, you however need to consider your expenses too – both anticipated expenses like food, conveyance, loan payments, taxes, supplies etc. as well as the unanticipated ones like medical bills and car repair costs. The incoming and outgoing money in your household is your cash flow. Good home budgeting can better your cash flow, i.e. will help you ensure more inflow and fewer outflows while reckless spending can do just the opposite! The bottom-line therefore should be to successfully manage and tackle the cash flow.

Home budgeting tips

Manage your home budget by tracking all the income/expenses that have occurred in your household month on month to figure out the bigger picture for a whole year! This will help you understand your weekly, monthly and annual cash flow and provide you with a good understanding of how your money is spent and saved! You will notice an improvement in savings with the progress of each month, as the stringent tracking of expenses will help you take a disciplined approach to excessive spending!

Once you understand the patterns of your income and savings graph you will be able to forecast your expenditure for the upcoming year, set new goals with regard to repaying your debts, planning your investments and improving your savings! To secure your finances for the future it is important that you save a minimum of 5-10% of your income every year!

Your sample home budget checklist

Mortgage/Loan repayments

Groceries and supplies

Utilities

Children’s education

Insurance premiums

Car/ Gas maintenance bills

Communication expenses like phone bills, cell phone bills, internet and cable TV charges

Subscription charges

Medical expenses

Entertainment costs

The reason why ‘Entertainment’ finds a place right at the end is primarily because this needs to the first to be sacrificed in a month where an unplanned or emergency expense crops up!

Paying the bills (even if you are not working and everything is being paid for from your spouse’s money), must be a prerogative for both the partners. Remember that you can chalk out a workable home budget and better the prospects of your family’s financial planning only if you have a clear-cut idea of the financial dealings that you need to make every month.

Emergency fund

The most successful of budgets always includes a contingency fund or an emergency account, to meet the unexpected costs that may arise in a household due to unforeseen events like a job loss for instance! Anywhere between 2 and 6 months of average income must always stay intact in this account.

The concept of green homes is a trend that is here to stay and is slowly but surely catching up in India. In the modern version of living, cities, towns and even villages are witnessing an increased preference towards building homes and creating an environment that contributes to the preservation of the ecosystem.

As far as application of this thought process to modern homes is concerned, the primary motivating factor that seems to help in making some positive progress in this direction, is the fact that going green can give home owners the ability to save on living expenses. Everybody who has lived in big towns and cities knows that life here can get overwhelmingly tough. It is not just the struggle to bring food to the table but also the desire to live comfortably. This is the reason why today every home has an AC, a refrigerator and so on. People don’t want to compromise on comfort but at the same time they don’t want to end up paying hefty energy consumption bills!

Green homes help such home owners get the best of both worlds by helping them cut down significantly on living expenses. By adopting green practices and by exercising the green philosophy, home owners can actually build on their goal to save.

Both builders and buyers are more aware of the benefits of going green, than ever before! Home owners in particular are seeing results in the form of reduced monthly expenses. So, everyone who is part of the equation is reaping benefits and this is reassuring to green enthusiasts who are trying their best to promote and sustain their efforts to build a greener planet.

As far as durability of home and home interiors go, the concept seems to play a big role. Homes that are built from green materials as part of building and furnishings tend to last longer and create significant real estate value. For instance, windows and walls that are designed and built to sustain this concept, don’t let outside temperature alter the conditions inside. For instance, one of the green concepts includes circulating water pipes sandwiched between two walls running all around the house. This keeps the interiors cool thus negating or limiting the need for an air conditioner. Also, the AC and appliances like the refrigerator function on optimum mode and expend less energy due to the cool environment, which shows up as significant savings on the bill!

When does a house become a green home?

When great care and attention is taken to optimally utilise energy and other natural resources for the healthy functioning of a house hold a house can qualify as a green home!

In India a building is certified as green when it is rated by Leadership in Energy and Environment Design, India advocated by Indian Green Building Council and The Energy and Resource Institute Green Rating for Integrated Habitat Assessment. These systems have been created to award ratings based on the concept of design, construction and impact on the immediate environment. Accordingly a building can be certified with a gold, silver or platinum rating depending on how evolved it is on the green parameter.

Is going green more expensive?

Specially treated construction materials and innovative systems have to be painstakingly incorporated during the construction stages to help achieve the objective of optimal use of energy, managing waste, optimally utilising renewable resources like water. For instance green homes might use high performance glass among other innovations to keep the interiors cooler or LED lighting that is three times the cost of normal lighting might be used to create an energy-efficient environment. However take heart from the fact that even if initial costs seem high, you will start recovering it within a couple of years of usage due to the enormous amount of energy-saving and reduction. Remember that every green element need not be expensive, you can utilise a number of low-cost construction methods to enable significant energy-saving as well. An ideal green home should be a combination of various methods, both expensive and inexpensive!

Here is a sample of possible green elements that can be part of your house construction!

Solar heaters: These use solar panels to optimally make use of sun rays to heat the water collected in an insulated tank. Depending on the capacity of the tank and water usage, you can heat water if there is sufficient sunlight just twice a week for a week’s water supply!

Benefits: This directly reduces the consumption of electricity worth rupees 600- 800 a month and helps recover installation cost in the span of 3-5 years. The cost of installation can amount anywhere between 7,000-12,000 Indian rupees.

Photovoltaic Panels: These use the energy from the sun to store electricity! You can actually live off the grid without any power supply if you integrate these panels with your building structure and create sufficient back up.

Some low-cost construction methods that help keep interiors cool during summer:

Thick walls with cavity: Such walls use up less number of bricks and leave a cavity within the wall and help in keeping the interiors cool.

Another effective low-cost construction method involves usage of soil and cement instead of just bricks to ensure nearly 15-20% cost saving and a cooler home!

Filler slabs and pre-cast elements for roofing is yet another effective construction method utilised for building roofs, which also help in keeping the interiors cool and results in 25% cost saving!

Rain water harvesting is a key element in renewing a water resource and helps in reaping long-term rewards and significant cost savings! This is nothing but an effective way to collect rain water and utilise it. This can be added as a provision in already constructed homes or incorporated while construction happens.

Though the concept of green homes is still in its nascent stages, many real estate authorities and builders are utilising the concept to educate their customers and use the same as a promotional tool to up their sales!

Gold is said to be the most-favored investment instrument in India. In year, 2011, India imported 969 tons of gold, which was much higher than the previous year. In every Indian wedding gold shares a major part of total bill and it is regarded as women’s most secured treasure. India’s main gold suppliers are Australia and South Africa.

What changes the budget proposes?

Considering the fact that one of the prime reasons of India’s current account deficit was around 50 per cent increase in the imports of gold and precious metals, in the Budget 2012-13, the honorable finance minister, Mr. Pranab Mukherjee proposed to increase the basic customs duty on standard gold bars, gold coins of purity exceeding 99.5 per cent and platinum from 2 per cent to 4 per cent. Furthermore, the duty on non-standard gold has been proposed to increase from 5 per cent to 10 per cent. Added to that, the finance minister proposed to enhance basic duty on gold ore, concentrate and dore bars for refining, from 1 per cent to 2 per cent. In addition, duty on refined gold is proposed to increase from 1.5 per cent to 3 per cent. In short, FM has proposed to double the duties on all forms of gold.

What is the impact of the same on prevailing gold prices and demand of it?

The increased customs duty on gold is expected to result in 1.96 per cent increase in the cost of imported gold. This hike, based on the current market price of gold in India, is expected to lift the cost of gold by additional INR 550. As the precious yellow metal was already a far end of the common man’s reach, the current hike in customs duty has further extended the distance. With this, there may be a slight decline in demand of gold from lower middle class. However, this decline is expected to be more than offset by the demand from affluent class. With this, the enhanced customs duty is unlikely to have a significant impact upon the growth in demand of gold.

What would be the impact on gold trade?

On the prima facie the hike in duty is expected to hold a mild negative impact on the Indian gold trade, it is definitely going to result in a shift of trade with the countries where India, as a country, has entered into free trade agreements and who have a low duty on gold. Currently, India has entered into free trade agreements with the following countries / blocks:

• South Asian Free Trade Agreement (SAFTA) – Members include Bangladesh, Bhutan, Nepal, The Maldives, Pakistan, Sri Lanka and Afghanistan.
• Association of Southeast Asian Nations (ASEAN) – Members include Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Myanmar, Cambodia, Laos and Vietnam
• Sri Lanka
• Thailand
• Malaysia
• Japan, and
• South Korea

Furthermore, the country may finalize these agreements with European Union, European Free Trade Area, and Canada in near term. Added to that, the free-trade agreements are separately made with Thailand and Malaysia other than the agreement under ASEAN. Under these agreements, the trade between these countries attracts either no duty or duty at concessional rates. For example – If the gold is to be bought from a country such as Thailand, with whom India has a free-trade agreement, will attract concessional custom duty of 2 per cent compared with the newly proposed 4 per cent. As a result, a gold trader, jewellery manufacturer, by just shifting his trade to the countries, with whom India has free trade agreements, can avoid paying additional duty on gold, which he has to pay if he sources the gold from India. With this the gold source from these countries is expected to remain cheaper for him than the gold purchased in India. Consequently, such purchase could yield a healthy return for him depending on the quantity imported.

What does this mean?

The exercise and example provided above clearly indicate that the gold sourced from the countries, with whom India has free trade agreements coupled with concessional duty arrangements on gold, is likely to remain cheaper than the gold procured in India. As a result, it is beneficial for a jewellery manufacturer, gold trader, gold dealer situated in India to Import gold from the countries such as Thailand and Malaysia rather than procuring the same in our own country. The reason for the same remains that in such case, the cost of gold is likely to remain insulated from the current hike in customs duty on the precious metal. With this, it can be easily presumed that the glitter of the gold is likely to remain and shine further the way it excelled in the past.

Exercising discipline is extremely important in every aspect of life. This cannot be more stressed in the case of managing your money. The manner in which you manage your expenses is the key to reduce liabilities and save more. According to a famous trading and investing legend- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure rather it’s the discipline of the investor.

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month.  However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans -  Rs 2,000; Mutual Funds -  Rs 4,000; Emergency fund -  Rs 1,000; Vacation fund -  Rs 1,000; PPF – Rs 2,000; Mediclaim-   Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest.  This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simples steps, you can make your money last longer!

You had been saving up for this wonderful trip to Europe and you finally made it! You spoilt yourself silly with more than an eyeful of Europe, some fine dining and went a bit overboard with your shopping as well!

You could afford some of the unplanned expenses thanks to your international credit card! You made sure you did the smart things and noted down the exchange rate too on the day you were making the transactions! You did some calculation of your own and determined with all the conversions that your credit card bill was likely to tally to around Rs. X.

After a jolly good time you arrive at home and begin the daily grind! Soon your credit card bill also arrives! What follows is shock! The bill amount is nowhere the nice round X number you had in mind! It overshot it by nearly 5-6%. In this article we will find out how exactly the amount on your credit card is calculated, so as in future you take this into account to avoid unpleasant surprises!

Why your calculated value and amount on the credit card statement differ?

The two entities involved in the transaction apply additional fees for a foreign credit card transaction resulting in an additional cost of 5 to 6% for the end user. The first entity being the issuing bank like SBI or ICICI and the second, network service providers like VISA and MasterCard.

Why additional fee is applied?

The primary reason additional fee applied is because of intricacies and additional cost involved with currency conversion. Yet another reason is addition of a small margin of profit by the issuing bank and Visa/MasterCard.

What is the type and amount of charges involved?

There are basically three types of charges involved:

1.  Foreign Currency Conversion fee – Since you own an Indian credit card, your balance is automatically in Indian Rupees. When you do a transaction overseas, say 50 Euro you will be charged a foreign currency conversion fee as well. Visa and MasterCard automatically charge a 1-2% fee on foreign currency exchange and anything in excess of it is generally a small margin of profit for the bank.

2.  Foreign Transaction Charge – Irrespective of the currency, transaction amount, or cash withdrawal, providers (SBI, ICICI, HDFC, BOB, PNB, City Bank etc.) charge a Foreign Transaction charge, which makes up for around 2.5 -3.5% figure off the total transaction amount.

3.  Cash Advance Fee- It’s common knowledge that cash advances are expensive even within the country. If you are using your credit card overseas, withdrawing cash will definitely increase the fees. You can be imposed a 1%-4% additional fee every time you carry out an overseas cash withdrawal. You will also be charged the standard cash withdrawal rate for your credit card together with the international cash withdrawal fee.

What about the currency conversion rate on the day of transaction?

The exchange rate that is applied to a transaction is the exchange rate as of the day of settlement, which is the day that VISA or MasterCard determines the settlement amount to be exchanged between the acquirer and the issuer. The settlement date is therefore typically different from the date of the actual transaction. So don’t be surprised if the exchange rate you were using for calculation differs from what has actually been used, as your transaction might have been posted to VISA or MasterCard after one or two days by your merchant. The exchange rate is calculated one day in advance by Visa and MasterCard and is applicable throughout the day for every transaction at the same rate.

Where to find out the information regarding these charges?

To avoid surprises in future it’s advisable to be equipped with the complete knowledge of charges which will be applied on your credit card transaction. The data of Foreign Currency Conversion fee is available on VISA and MasterCard web sites. Please refer it just before you travel as these rates keep on changing.

Data of Foreign Transaction Charges and Cash Advance Fee is available with the issuing bank like SBI, ICICI etc. and you can call their customer care to find out the same before packing your bags. These charges are also dynamic and you might see them fluctuating at regular intervals.

How to choose the best credit card?

If you are a frequent flyer please enquire about the foreign transaction charges and cash withdrawal fees before applying for the card. You might find a difference if 1 to 2% in the offers of credit cards from various banks. Choose the one which charges you the minimum. Nothing much can be done about the currency conversion charges as they are levied by MasterCard and Visa so no point in worrying about that!

It is critical to read the offer document of the credit card provider. You should not treat it as a piece of paper, which just dies a silent death in the offer envelop. Next time around atleast scan your offer document. You will come across a lot of facts which might surprise you. The details of all the charges will be clearly detailed in the offer document. You might not find the exact values as they are pretty dynamic in nature but the rules which govern them are present in the offer document. Mind you, credit card business is one of the most lucrative businesses for the bank and it’s very easy for them to charge a heavy transaction fee.

The importance of paying the full amount cannot be stressed more as banks can charge you a hefty interest rate if you just keep paying the minimum amount due! It’s a practice best avoided. Another big no is cash withdrawal on your credit card, it’s the most expensive form of credit one can avail, so steer clear of it.

When we talk about credit card usage we find different people managing it in a different way. Some people are highly disciplined and never default on their monthly installments and others are so messy that they are always on the top of the defaulter list. Managing finance is a complex task and it’s very easy to fall into a debt trap if you misuse the power of free credit. Credit card provides you the power but it never suggests that this power is unlimited. You have to pay the dues back at the end of the free credit period but somehow the human mind doesn’t listen. To avoid getting into trouble in future it’s advisable to understand your credit personality and choose the credit card which suits you the best. Credit card companies provide credit cards with different features like different interest rate, different reward structure, different credit limits etc. If you understand the way you deal with credit it gets easier to choose the best combination for you. Let’s see what kinds of credit personalities exist and what card they should opt for.

The Beginner

You are just out of college enjoying your first job. You never had surplus money and hence no financial planning was required. You have never used credit previously and find the concept amazing. As expected, you are in a hurry to apply for one.

For beginners it’s advisable not to go for cards with high credit limits. You still do not know how you are going to use your card. Your financial wit has never been tested so better be cautious. This is just the beginning and once you are sure that you can manage your finances well, you can opt for credit cards with a higher limit.

The Disciplined

You have been there and done it all. You are great at financial planning and almost everything is in perfect shape. You never default on your monthly payments and never spend beyond your means. Reward offers don’t alter your spending pattern and you plan every move before executing.

For the disciplined the best suited card is one with cash back facility and good reward structure. The reward points should accrue irrespective of the type of purchasing done and can be redeemed at one go. Interest rate on your card doesn’t matter much as you always pay on time.

The Carefree

You love spending and believe that spending is the motivation for earning. You plan things beforehand but don’t mind going overboard at times. You cross your spending limit at times so you don’t make full payments on your credit card.

The most important feature which the carefree should look for in a credit card is the interest rate. As you carry forward the balance your interest expense is going to be high. It’s advisable to choose the card which offers the lowest interest rate. You should also make sure that your card does not have any annual maintenance charges attached to it.

The complete mess

You don’t understand financial management. Almost every time you do not even pay the minimum amount due on your credit card. All the customer care executives of the bank know you by name and are in constant touch with you. You always end up paying heavy interest and late payment charges.

For the messy it is better to use prepaid cards as it will save a great deal of money which you pay in the form of interest and various charges. This will prevent you from spending beyond your means.

The Credit Fearing

You never wanted a credit card in the first place. According to you being in debt is a crime. You applied for the card just because it made your life easy in some scenarios like booking air tickets and overseas purchases. You only swipe it in some kind of emergency and it goes unused at times for months.

The best card which will suit your needs is the one with no annual maintenance charge. You never make late payments and you are not a frequent user so interest rate and reward structure of the card doesn’t matter much for you.

Conclusion

There are a wide variety of credit cards available in the market and it’s not possible to research all of them. The better approach in such a scenario is to research your personality and then research the cards available. While you define your personality you get to know the basic traits your card should have. Once you are sure about the traits the list of cards automatically gets shorter. The best approach is to talk to the bank and discuss with the executive regarding your needs and spending behavior. They will definitely guide you with better options as banks are getting more and more cautious about their relationship with the customer. The existing competition in the market compels them to give better services to their clients. Rather than doing the entire math yourself, put forth some direct questions to them, which will help you make the best decision.