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Now a days, credit card has become a fashion or you can say, for some people it has become a “Mazboori”. God bless me, I have applied for this little piece approx six times and I didn’t get it. So finally I thank to god for not giving me an opportunity to use this master card.
When I came across this term “Credit card”, suddenly one question came into my mind—how these credit card companies make money. After doing a bit google and consulting with my friends I got some points which I would like to share. I hope these points may give you a little bit answer if you already have this question in your mind.
1.Let’s start with a real time experience which I had when I went to shop with my friend. Here is the conversation which I had with cashier of the shop.
Me— do you accept credit card?
Cashier—yes we accept.
Me—any discount for TATA employees.
Cashier--- yes we have, if you pay by credit card then 7.5% discount and if you pay by cash then we’ll give you 10% discount.
So here you can see the difference in discount percentage (2.5%) which is basically due to the mode of payment. If you pay by credit card then the shopkeeper has to pay some amount to the bank who issues the card. This happens with all the purchase done by credit card and the percentage varies from 1% to 4%. Now you may ask why the shopkeepers accept card at all. Well now a days nobody carries cash with him. So ultimately there is no option left with the shopkeeper but to accept the card to improve his sell.
2. This is an example which happened with one of my friend. He has HDFC credit card and the limit is up-to 25k. Previous month somehow he crossed the 25K limit and the best part is the card was not denied at the time of transaction even though it crossed the limit. When he got the bill, additional Rs 500 was charged to him due to over limit. Immediately he called to bank and asked “how the credit card was accepted if it crossed the limit”, finally he got to know that he was a very old card holder that’s why bank has allowed him to cross the limit.
So I hope you understand the moral of the story. Over limit and late payment is one of the innocent ways to make money even if it is the mistake done by bank.
3. You might have seen the advertisement on the credit card bill if you have one. You’ll find lot of offers which give you some discounts if you use this card for some service. For example—if you book a flight ticket through this card you will get 15% discount etc. this may be one of the way to make money. It’s all depends upon the deal made between the bank and other service providers.
4. Service charge, higher interest rates, cancellation fee, charging more for use overseas, charging fee for card protection etc. are the ways to make money.
So ultimately there are several ways you can be charged either by mistake or intentionally, or as a normal process.
A lot of confusion went into my mind when I came across these words and ultimately I found that these are just big shot child of the big shot daddy.
Lot of concepts overlap these terms and there are concepts which make the difference. Ultimately these are son of economy (The Godfather) and define the properties and condition of their daddy. Let’s try to keep it simple.
Microeconomics is study of decision that people make running their business. Like for example—what should be cost of the product, how much profit they should make by selling the product, what should be the resource of raw material, where to invest, how to maximize the profit, or why to maximize/minimize the profit. When you ask all these questions to yourself by keeping the government tax regulation in your mind then you deal with the younger bro “Micro” and of course this includes the supply demand crap. So we can say this is nothing but a small introduction to the economics family.
Now when we come to higher level than the elder one comes into play i.e Mr. “Macro”.
Macroeconomics is the field of economics which tells/study the behavior of economy as a whole. It not only includes all the business but also includes employment, GDP, Inflation, Price level (in general), national Income, Import/export analysis, capital flow etc. These all are done at national level.
Well you can easily see Mr. Macro has the power the attorney. The bottom line is “Micro” is the ground work analysis or we can say a bottom-top analysis and “Macro” is the top-bottom analysis. But you have to understand both of them to be a part of this family.
I was pretty much confused about these terms until I read “Rich Dad and Poor Dad”, though it has some inspirational stuff but apart from that it also has some interesting things. If you have already read this book then you must have come across these words and I hope you have the difference. No need to worry if you are still confused, just relax and breathe.
Assets and liability both have some value.. the only difference is, an asset gives you some income and increases its value as time is passed. A Liability gives you all comforts except the income and the value decreases as the time is passed.
Simply put, an asset is something that puts money in my pocket, A liability is something that takes money out of my pocket..
For instance, this is the cash flow pattern of a poor person, or a young person still at Home:
Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation)
Asset (none)
Liability (none)
This is the cash flow pattern of a person in the middle class:
Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun Transportation)
Asset (none)
Liability (Mortgage Consumer loans Credit Cards)
This is the cash flow pattern of a wealthy person:
Assets(stocks bonds notes real estate intellectual property)->income (dividends
interest rental income royalties)
Liabilities (none)
Difference is pretty much clear in the flow, if you compare the cash flow of wealthy person with others you can find the only thing is asset, which makes him wealthy. Let the asset take care of your income so start buying assets and avoid purchasing liabilities.
After doing a lot of Google, I was confused between these two simple terms “Deficit” and “Debt”. So I finally searched in the oxford dictionary and found the basic difference between these two terms. It helped me to realize the meaning of these words.
A debt is a sum of money that you owe someone, and a deficit is the amount by which something is less than what is required or expected, especially the amount by which the total money received is less than the total money spent.
Well the above definition may help you out, but it would be better if we take an example to explain these.
Suppose our govt. has set a target to spent Rs. 2000cr per month. Now at the end of first month they spent Rs. 2100cr which is unexpected but important. So here the difference of Rs 100Cr is nothing but monthly “deficit” (compare it with the basic meaning of deficit). Now suppose this 100cr deficit continues the whole year and ultimately the sum rounds up to Rs 1200cr. This 1200Cr is “Debt” of that financial year.
In short Debt is the sum of all deficits. Debts always occur, but deficits may not be as uncontrollable since the economical situations changes every month or year. Theoretically, it is possible to have no deficits in a month, but if there are deficits in the other months or years, then they will eventually accumulate and become a debt.
so deficit is a kind of “chota Udhari” which accumulates to “Bada Udhari” i.e Debt.
These are commonly used terms in banking sector. Let’s take an example to explain these things.
Suppose you want to start a business and to raise capital for your new business you went to a “Muneem”. Of course, He can’t give to money by simply looking at your face instead he has taken some security deposit like properties papers/jewelry then gave you some money with a particular interest rate. After some period of time, Mr Muneem came to know that your business is doing well so he decides to sell your security deposits (which you have given while raising capital) to you at a particular interest rate. Finally he sells you some of the securities and gets some of his money back.
Before I explain further let me tell you something about Mr Muneem. He is a kind of person who is the head of all the people running their business in a particular area. He manages all the capital flow i.e lending money to the people who want to start business or want to improve their business. The extra ordinary thing he does is, when he finds that the flow of money in that area is adequate and further injection of money can cause instability in market, then he decides to tighten the money flow by selling the securities deposited by some of the business men. So he’ll lend money at a particular interest rate as per his choice and will take the money at a particular interest rate as per his choice.
Now all you need to do is, to correlate the entire scenario with RBI and all the commercial banks of our country. Imagine Mr Muneem as RBI and all the business men/ Newbie as commercial banks. The rate at which Mr Muneem lends and gets his money back is nothing but Repo Rate and Reverse repo Rate respectively. At least by now, you might have got some idea about the mechanism.
So we can say, Repo and Reverse Repo are rates available in the hands of RBI to manage the liquidity or money flow into the system. It either injects liquidity into the market if the conditions are tight or sucks out liquidity if the liquidity is excess in the system through the Repo and Reverse Repo mechanism. Now in REPO rate RBI injects liquidity into the system i.e. it purchases the securities from the banks and lends money to them to ease their liquidity crunch. The rate charged by it for lending money is the REPO rate. Reverse REPO rate is the opposite of REPO: When liquidity is excess in the system. RBI sucks it out by Reverse REPO by lending securities and taking out money from banks. The rate charged for it is the Reverse Repo rate.
Note—Above rates are decided by central bank i.e RBI.
You can easily get this (Rate) information at RBI home page right hand side under heading Current Rates
http://www.rbi.org.in/home.aspx
In simple terms, when there is a rise in general price level of goods and services it is known as inflation. The best example I can give you is, some years back gold flake cigarette (small one) was available at 1.5rs and now the same thing you’ll get in 3.5rs so this shows the inflation which is occurring each and every day and this thing will continue.
Suppose you got a salary hike, now your company will definitely increase the prices of goods and services so that they can satisfy your hunger for money which leads to a kind of inflation or increase in price for the product sold by your company. Ultimately the cycle continues and the prices are increased unless and until there is something wrong with the company or the employee.
If you remember something about the demand/supply thing in economics then we can say, if there is an increase in demand and supply is less or we can say supply is not in sync with the demand then prices of the all “Rashan Pani” is increased, which leads to inflation. Sometimes inflation occurs due to rise in the quantity of money in the market which occurs due to govt spending. and in technical term we say it “Fiscal Inflation”.
Some says inflation is neither very good nor very bad for an economy. Till now, you might be aware of the bad impact of inflation. I’ll tell you who gets the benefit when inflation occurs.
Suppose Ram is a grocery shop owner (wholesale and retail). Somehow he has got a feel that inflation is going to occur in coming days so he has started purchasing and put all the basic Ration (Rice, Dal, Wheat etc) in his godown with let say20rs/kg on an average. At the time of inflation he sold the same stocked goods at 30rs/kg on an average. We can see, he has got 10rs/kg profit straight forward. Ultimately he is the one who got the real benefit of inflation.
Always remember inflation doesn’t occur due a single reason, there are several things/factors which as a whole cause inflation.
There are several ways through which you can calculate inflation rate. Some calculate it through CPI (Consumer Price Index), some calculate it through WPI( Wholesale price Index). I think this is not the right time to discuss these things, we’ll cover this in coming Posts.
It looks like a very heavy term but basically it refers to the money which is raised by the government to supports their budget estimate for a particular financial year.
Example— For session 2010-2011 government is going for a moderate hike in GBS by 15%, and it put them in a big dilemma, because government has made so many promises to fund schemes for common man etc. Already inflation is somewhat not in favor of our government and the same figure seems to linger upon us in future, if there is more spending by the government. So here comes the real need to play the game carefully so that there should not be any economic instability.
GBS stats are generally presented by finance minister in union budget.
