IT’S said that Forewarned is often Forearmed. This aphorism has given birth to a generation of knowledge seekers. Everyone wants to know every detail about everything before they do anything. No wonder websites like Howstuffworks.com have been born and are doing rather well.

While it may not serve any purpose to know how snow leopards mate or how galangal is grown in Thailand, there are a few things that we would do well to learn about. Credit cards is definitely one of them.

Let’s learn some fast facts:

The Basics

• When you apply for a credit card, the bank you apply to carefully screens your application. You cant blame them given that there is always a crook around the corner. 
• A credit limit is worked out for you, based on your financial capability and other parameters like income levels, educational qualifications, age etc. The bank that issues you the card is called the ‘issuing bank’.

The Business

From the bank’s point of view, credit cards are good business for two reasons.

• Banks make money through fees from merchant establishment. 
• The higher than normal interest rate paid by cardholders for the balance in their card.
• So what are these merchant establishments? These form the heart of the business. Merchant establishments can be hotels, shops, travel agencies or any place where money transactions are made. The banks that enroll merchant establishments are called ‘acquiring banks’.
• The relationship between the bank and the merchant establishments is run via international networks such as Visa and Master card.
• Your credit card is valid in any merchant establishment that accepts your network (ie Master Card or Visa), irrespective of the issuing bank. Most Indian card issuing banks are part of either Master Card network or Visa network, or both. There are others credit card networks like American Express and Diners Club too.
• The merchant establishment finds the credit card a safer and efficient payment mode, and brings more business. The merchant establishment pays a fee to the bank that enrolled it for the service.

The Transaction

• • When you use a card at an establishment to purchase a product or service, your card is swiped on a swipe-machine. The swipe machine is connected to a central computer belonging to the network, which in turn is connected to all issuing banks. 
  • The system verifies with your issuing bank whether you have sufficient credit to cover the purchase in a few seconds, and approves or rejects the transaction. As soon as approval comes through, you are asked to sign the charge slip. The merchant then verifies your signature with the one at the back of the card.
  • The charge slip is then forwarded to the acquiring bank, which in turn settles the transaction with the merchant. The issuing bank also proceeds to bill you for payment as per the cardholder agreement. The acquiring bank will settle the transaction with your issuing bank through the network.

  Sounds pretty straightforward? Then you’re wondering why credit cards are such accursed instruments? That happens when you delay payments and get caught in an interest cycle. When you use a credit card you have the option to pay only a part of the total amount spent and carry forward the balance. But in such a case you will have to pay interest on all your purchases without any free credit period.

  You can save yourself only if you are prompt in paying the balance by the due date. Credit card users get a free period of credit before they reimburse the credit card issuing bank. This may vary from 15 days to 40 days depending on the issuing banks.

  So that concludes our session on How Credit Cards Work. If you’re now looking for information on How Snow Leopards Mate then you’re on the wrong site my friend!
  
  Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

   

   

CREDIT cards are a lot like nagging wives — you can’t live with them, you can’t live without them.
From temporary borrowing, transfer of existing debt, facilitating regular purchase, social status and bill payments etc, credit cards seem to be a one-stop solution. The wife of course is a one-stop solution for everything in life.

But the downside is pretty steep too. High interest, threatening agents, bad credit history etc can follow a credit card And since you plan to enter a long term relationship with both — it’s best you choose carefully. But these days it may be a better idea to spend more time choosing your credit card than your wife because while your wife will forgive you if you forget her birthday, you credit card will not be as forgiving if you forget due day.

So let’s see what you need to keep in mind while choosing your credit card:

1. Joining and annual fees
Many credit cards are being offered free for life except a few high-end credit cards. Hence you should ideally go for a card, which has no annual or joining fees. Make sure it’s a lifetime offer and not just for the first year.

2. Balance transfer facility
Many consumers look at credit cards as a short-term debt facility. When a consumer is not able to manage the debt with one credit card, he wishes to transfer the debt on the other card. Balance transfer feature could be very useful in such a case.

3. Interest rates
Beware of this one. When credit card dues are not paid within the given period, banks charge interest on the amount due. If you are taking a credit card to avail a short-term loan, interest rate has to be taken very seriously. Generally these rates vary from 1.33% to 3.15% per month depending on the card type and other features.

4. Credit period
Usually, all banks that provide credit cards extend a free credit period of 21-52 days. This depends upon the type of card and the date of transaction. More the interest free credit period, the more time you have to pay off the due without having to pay the interest.

5. Credit limit
This the is the maximum amount you can spend at a time, using your credit card. This depends on your income, which the bank refers to when issuing you the card. The general outlook is — higher the credit-limit the better! This is not advisable unless you intend to use the credit card limit.

6. Customer service
Few years back, customer service was not a greatly developed concept in banking as well as credit cards. Now customer service is a factor to be taken very seriously when going for a credit card. It’s better to go for a credit card offered by a bank with which you already have an existing good relationship.

7. Reward points and cash-back
All banks are trying to attract customer through schemes like reward points. Especially people who intend to use the credit card fairly regularly should look for good reward point schemes.

8. Shopping perks
A good credit card is acceptable with most merchants in the town and across the country. Having tie-ups with multiple outlets, which offer great discounts, and shopping schemes are an added advantage. This also includes the waiver of surcharge at petrol pumps and utility bill payments.

That’s a long list isn’t it? The smart way to select a credit card is outlining the needs first. Don’t go for features that you will never use. Thankfully the path to selecting the right wife is a whole lot simpler, especially in our country — Just ask your parents to do it for you!

Investments in ELSS schemes have a lock-in period of three years. Is this applicable to the dividends declared under the scheme as well? For example, if I purchase 100 units of any ELSS scheme on April 1, 2008, the lock-in period will be till April 1, 2011. If I am allotted 10 additional units as dividend on March 30, 2009, will the lock-in period be applicable to them also? Does it mean that the additional units can be sold only after March 30, 2012?

- Anish Jain

You are right about equity linked savings schemes (ELSS) having a lock-in period of three years. Once that period is completed, you can redeem your investment.

In the case of dividend reinvestment, the dividend declared is reinvested in the scheme itself. So it would be locked-in for three years as well.

In case of dividend payout, the dividend amount is distributed to the investor and so no lock-in period is applicable on it.

Now let’s talk about your example. You get 10 additional units on March 30, 2009. These units would be locked-in for three years from the date of reinvestment. So, you would only be able to redeem these 10 units post March 30, 2012. However, the units allotted initially can be redeemed on or after April 1, 2011.

Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of much discussion and debate. On the one hand, they were a trifle too complicated for individuals not yet exposed to the stock markets; on the other hand, they were much-maligned because of the ‘unusually high’ costs.

As ULIPs made their presence felt, insurers were more open to discussing the costs and how they evened out over the long term. This and the flexibility that ULIPs offer became important points that made individuals consider adding them to their portfolios.

Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility.

If you are between 25 and 35 years of age

You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child’s education/marriage to planning for your own retirement to providing for the family in your absence.

The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance — the cheapest way to get a life cover for yourself.

Term insurance is also insurance in its ‘purest’ form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan.

Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the ‘risk’ element, who is going to take care of the ’savings’ part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product.

So how can ULIPs help you save for child’s education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety.

Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don’t have traditional endowment, pension and child plans at all!

What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives.

If you are looking to set aside some money for your child’s education, the 5%-6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation, it should be enough to cover the cost of education.

And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role.

As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs.

You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child’s future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective.

Opt for a ULIP child plan to provide for your child’s higher education, marriage and seed capital for business to name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.

The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.

Again, a long-term investment objective like retirement planning could do with an equity ‘push’. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance.  

If you are between 35 and 45 years of age

By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP.

However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven’t insured yourself as yet, go for a term insurance plan.

The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one.

You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive.

If you are over 45 years of age

In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle, income, needs and financial commitments. Beef up your insurance cover through a term plan.

By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.

6 points to note

Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimise the benefits associated with them.

• Notice we have recommended ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.
• Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
• Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.
• ULIPs derive their ‘power to perform’ from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).
• Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.
• Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side.