credit sources and credit cards

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Personal Financial Planning

Assignment 3

Credit Sources and Credit Cards

Submitted to: Submitted by:

Miss. Nitika Sehgal


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Various credit sources for loans:

Getting loan is a challenge. Depending on the economic environment we will likely face

higher interest rates and more restrictive loan terms. An individual or a company would

choose from among various sources of finance depending on the amount of capital required

and the term for which it is needed. Different Credit sources can be divided into three

categories:

i) Traditional Sources of Credit:

Internal resources have traditionally been the chiefsource of finance for an

individual or for a company. Internal resources could be personal savings,companys assets and profits that have not been reinvested or distributed among

shareholders.

ii) Venture Capital (VCs):

Firms in the early stages of development can opt forventure capital. This option

gives the financing company some ownership as well as control over the direction

of the enterprise.

iii) Installment Credit:

Firms may get credit from equipment suppliers. The supplier may allow the

purchase of equipment with payments extended over a period of 12 months or

more. Some portion of the cost price of the asset is paid at the time of delivery and

the balance is paid in a number of installments.

iv) Bank Credit:
http://sourceoffinance.com/http://www.economywatch.com/finance/sources-of-finance.htmlhttp://www.economywatch.com/finance/sources-of-finance.htmlhttp://www.economywatch.com/finance/sources-of-finance.htmlhttp://sourceoffinance.com/


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Commercial Banks play an important role in financing the short-term

requirements of business concerns. They provide finance in the following ways:

a) Loans: When a bank makes an advance in lump sum, the whole of which is

withdrawn to cash immediately by the borrower who undertakes to repay it in

one single installment, it is called a loan.

b) Cash credit: It is the most popular method of financing by commercial banks.

When a borrower is allowed to borrow up to a certain limit against the security

of tangible assets or guarantees, it is known as secured credit but if the cash

credit is not backed by any security, it is known as clean cash credit.

c) Discounting of bills: Commercial banks finance the business concern by

discounting their credit instruments like bills of exchange, promissory notes

and hundies. These documents are discounted by the bank at a price lower than

their face value.

v) Term loans from banks:

Many industrial development banks, cooperative banks and commercial banks

grant medium term loans for a period of three to five years.


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vi) Loans from commercial banks: The consumers can also take the loan from the

nationalized banks like SBI, ICICI, PNB etc. The interest rate of these banks is

relatively same as compared to other banks in the industry.

vii)Public deposits/fixed deposits for duration of three years: The various Public

deposits and fixed deposit instruments are also a source of credit for the

individuals.

viii) State financial corporations: The state financial companies like Power Finance

Corporation of India, Infrastructure Finance Corporation of India (IFCI), are also

the major source of credit for the individuals and corporate as well.ix) External commercial borrowings (ECBs): The consumers can also borrow money

from the overseas market like from various developed nations as USA, Germany

and Japan, where the current interest rate is very low. Hence this is one of the

cheapest sources of credit for the individuals.

x) International Financial Institutions: Institutions likeWorld Bankand International

Finance Corporation (IFC) provide long-term funds for the industrial development

all over the world. The World Bank grants loans only to the Governments of

member countries or private enterprises with guarantee of the concerned

Government. IFC was set up to assist the private undertakings without the

guarantee of the member countries. It also provides them risk capital.

xi) Non-Resident Indians: Persons of Indian origin and nationality living abroad are also

permitted to subscribe to the shares and debentures issued by the companies inIndia.

Among the different sources of loans here, one of most important is GE Money. This is an

international company based in United States and having its operations across the world.

The reader should note here that GE Money is the trading name of GE Finance and

Insurance and is one of largest consumer finance companies in New Zealand. In the span

of just 10 years, this source has been able to create an asset size of $105 billion. In New
http://business.gov.in/outerwin.php?id=http://www.worldbank.org.in/http://business.gov.in/outerwin.php?id=http://www.worldbank.org.in/http://business.gov.in/outerwin.php?id=http://www.un.org.in/Agencies/ifc.htmhttp://business.gov.in/outerwin.php?id=http://www.un.org.in/Agencies/ifc.htmhttp://business.gov.in/outerwin.php?id=http://www.worldbank.org.in/http://business.gov.in/outerwin.php?id=http://www.un.org.in/Agencies/ifc.htmhttp://business.gov.in/outerwin.php?id=http://www.un.org.in/Agencies/ifc.htm


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Zealand, GE Money provides different types of products like debt consolidation loans,

home equity loans, car loans and loans for any other purpose like enjoying vacations etc

a) Personal Borrowing: Borrowing from friends or family is the simplest, and often

least costly, unconventional method of getting loans

b) Mortgage Loans: There are lenders who specialize in subprime borrowers, in other

words those with low credit scores. You will pay a higher interest rate for such loans

and you will be required to clearly demonstrate your ability to pay.

c) Secured Loans:

Different Finance Needs are as follow:

a) To Finance fixed assets:

Business requires fixed assets like machines, Building, furniture etc. Finance required

to buy these assets is for a long period, because such assets can be used for a long

period and are not for resale.

Below are some examples of typical financial needs for various age groups:

Ages 16 - 20

cost of education

cost of travelling

Ages 20 - 35

career changes

house purchase

starting a pension

Ages 35 - 50

additional pension contributions

moving house

divorce


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Ages 50 - 65

part-time work

repaying the mortgage

grand parenting / aged parents

making a will

retirement planning

Post retirement

health care costs

holiday costs

moving house

Credit Card:

It permits the person named on it to charge purchases or services to his account charges for

which he will be billed periodically. This information is checked where we use it for example

by automated teller machines (ATMs), store readers, Internet computers and banks. Credit

card issuers usually waive interest charges if the balance is paid in full each month, but

typically will charge full interest on the entire outstanding balance from the date of each

purchase if the total balance is not paid.

Grace period:

A credit card's grace period is the time the customer has to pay the balance before interest is

assessed on the outstanding balance. Grace periods vary, but usually range from 20 to 50 days

depending on the type of credit card and the issuing bank. Some policies allow for

reinstatement after certain conditions are met. Usually, if a customer is late paying the

balance, finance charges will be calculated and the grace period does not apply. Finance

charges incurred depend on the grace period and balance; with most credit cards there is no

grace period if there is any outstanding balance from the previous billing cycle or statement

(i.e. interest is applied on both the previous balance and new transactions).

Credit card issuers (banks) have several types of costs:


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Annual Percentage Rate (APR): The annual percentage rate, or APR, is the percentage

applied to balances that you carry beyond the grace period. The higher the APR, the higher

your finance charge will be when you have a revolving balance. Most Credit Cards have a

different APR for purchases, balance transfers, and cash advances. Make sure you know the

APR for each.

Operating costs:

This is the cost of running the credit card portfolio, including everything from paying the

executives who run the company to printing the plastics, to mailing the statements, to running

the computers that keep track of every cardholder's balance, to taking the many phone calls

which cardholders place to their issuer, to protecting the customers from fraud rings.

Depending on the issuer, marketing programs are also a significant portion of expenses.

Charge offs:

When a consumer becomes severely delinquent on a debt (often at the point of six months

without payment), the creditor may declare the debt to be a charge-off. It will then be listed as

such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status"

column to denote a charge-off.) The item will include relevant dates, and the amount of the

bad debt.

Other Fees charged to customers:

The major fees are for:

Late payments or overdue payments

Charges that result in exceeding the credit limit on the card (whether done deliberately

or by mistake), called over limit fees

Returned cheque fees or payment processing fees (e.g. phone payment fee)

Cash advances and convenience cheques (often 3% of the amount)

Transactions in a foreign currency (as much as 3% of the amount). A few financial

institutions do not charge a fee for this.

Since each consumer's financial needs are different, it makes sense that there are different

types of Credit Cards. Before you apply for a Credit Card, become familiar with the various

kinds of Credit Cards to make sure you're choosing the best Credit Card for you.
http://en.wikipedia.org/wiki/Operating_costhttp://en.wikipedia.org/wiki/Charge-offhttp://en.wikipedia.org/wiki/Equifaxhttp://en.wikipedia.org/wiki/Operating_costhttp://en.wikipedia.org/wiki/Charge-offhttp://en.wikipedia.org/wiki/Equifax


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a) Standard Credit Cards:

The most common type of Credit Card allows you to have a revolving balance

up to a certain credit limit. Credit is used up when you make a purchase and

made available again once you've made a payment. A finance charge is

applied to outstanding balances at the end of each month. Credit Cards have a

minimum payment that must be paid by a certain due date to avoid late-

payment penalties.

b) Premium Credit Cards:

These cards offer incentives and benefits beyond that of a regular Credit Card.

Examples of premium Credit Cards are Gold and Platinum cards that offer

cash back, reward points, travel upgrades, and other rewards to cardholders.

Premium cards can have higher fees and usually have minimum income and

credit score requirements.

Both standard Credit Cards and premium Credit Cards have specific types of

Credit Cards. Student Credit Cards, zero percent interest cards, and travel

cards are just a few types available.

c) Charge Cards:

Charge cards do not have a credit limit. The balance on a charge card must be

paid in full at the end of each month. Charge cards typically do not have afinance charge or minimum payment since the balance is to be paid in full.

d) Limited Purpose Cards:

Limited purpose Credit Cards can only be used at specific locations. Limited

purpose cards are used like Credit Cards with a minimum payment and finance

charge. Store Credit Cards and gas Credit Cards are examples of limited

purpose Credit Cards.


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e) Prepaid Credit Cards:

Prepaid Credit Cards require the cardholder to load money onto the card

before the card can be used. Purchases are withdrawn from the card's balance.

The credit limit does not renew until more money is loaded onto the card.

Prepaid cards do not have finance charges or minimum payments since the

balance is withdrawn from the deposit. Prepaid cards are similar to debit cards,

but are not tied to a checking account.

f) Business Credit Cards:

Business Credit Cards are designed specifically for business use. They provide

business owners with an easy method of keeping business and personal

transactions separate. There are standard business credit and charge cards

available.

Various Uses of Credit Card:

Credit cards are used for more than simple purchases. You need them to reserve hotel rooms,

rental cars, and airline tickets. They are also for emergency purchases when cash is not

available on-hand. Also, credit cards help build your credit history, which is important if you

ever make major purchases such as cars or a home. As the others mentioned, it is important to

manage credit card debt because the interest can eat you up.

i) Free Credit Period:

Firstly the Credit Card offers you a free credit period (of 50-55 days) from the date of

the billing cycle which helps you to purchase on credit without any hassle of carrying

cash, thus making your shopping much easier.
http://www.deal4loans.com/credit-card-offers.phphttp://www.deal4loans.com/credit-card-offers.php


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ii) Advantage of various Branding offers:

Most importantly credit cards offer various discounts & schemes which are associated

with entertainment, travel, shopping etc. Issuing Credit Card Banks tie up with the

reputed brands to sell products/services at attractive rates which you can buy through

your credit cards. To check offers running on your credit card.

iii) Borrowing cash through credit cards:

You can also withdraw cash through ATMs at any time.

iv) Credit Cards also offer reward points on purchases which you can accumulate and

redeem later with cash backs & attractive gifts etc.

Comparison of credit cards:

There are excess of credit card choices available in the market which would simply clutter the

process of choosing your card, so before you opt for a card you must evaluate the card

features on the basis of following points:

a) Interest rate: The interest rate is levied by banks whenever you revolve your

outstanding balance into your next billing cycle; it ranges from 2.79 - 3.9 per cent per

month varying from bank to bank. Go with the bank which has the cheapest interest

rate.

b) Annual Fee, Joining Fee & other features: You should review the features of the

cards available; make sure that the card offers maximum features such as zero annual

fees, zero joining fee 24-hour helpline & good reward points program.

c) Grace Period/Interest free Period: It is that period offered by banks during which

they dont levy any charges, the period is between the statement date and the due date

of payment. It is normally between 15 to 20 days and varies from bank to bank. You

must look for a card which offers maximum grace period.


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