Understanding How to Use Credit Cards the Smart Way

India has entered the era of plastic money. Credit is abundantly available just through the swipe of a card, with no questions being asked. Credit card marketers are enticing people into spending more than necessary. Being in debt, through use of credit cards, can results in a vicious cycle. Therefore, proper caution and restraint needs to be exercised when using credit cards. Here are a few basic things that you must know and do to get the best out of using your credit card.

What is a credit card?

A credit card is a facility by which the issuer of the card, the lending organization, agrees to provide credit to the user of the card, up to a certain period of time, at the end of which the outstanding amount is expected to be paid back to the lender. If the amount is not paid back in full, then the lender will levy a charge. Credit cards are the most expensive form of debt available, and should be used only if one has the discipline to pay back one’s dues in time.

The major benefit of a credit card is convenience. The issuer is willing to give you a loan. As a customer, you should use credit cards only for short-term gaps in your ability to purchase goods or services. Ultimately, you have to pay the loan amount back. And if you don’t have the money, then you will pay heavily for it in late fees and charges, which could often be more than you originally spent on the card.

Terms and conditions

Every card will come with terms and conditions. These will specify your rights and obligations towards the issuer of the card. Always read the fine print carefully. Once you start using your card it is assumed that you have read and accepted all the terms and conditions. So read and clarify what you must, before using your card.

Annual fees

Earlier it was common practice for banks to waive annual fees for the first and second year and not beyond this. However, as the market has become more competitive, a lot of credit card companies are doing away with the annual fees completely and are issuing life time free cards. So, shop around to see which is the best card that you can get at the cheapest fees.

Understand your billing cycle

A billing cycle is the period between two statement dates and is normally a period of 30 days. While using your card to buy big ticket items, time your purchase in such a way that you get a longer credit period. For instance, you could use your card to make a purchase at the beginning of your billing cycle. This way you get more time to pay back the issuer because you will not get a bill for at least a few weeks. In case you have more than one card ensure that the statement dates and payment due dates fall on different dates, so that your payments are not due on the same date.

Minimum payment due

The minimum payment due every month is generally 3% to 5 % of your total amount due, but that does not mean that you should pay only this small amount. It is strongly advisable to pay the entire outstanding amount due in one go in order to avoid carrying forward of your balance. The moment you start carrying forward your balance you will have to pay an interest on the unpaid amount. The interest charged could be as high as 40% which is almost double the rate any other lender will charge. This is where you have to be judicious and pay off as soon as possible to avoid credit card debt.

Late payment fees

Late payment fees are charged as penalty for not paying the minimum amount due, on time. The penalty levied is 30% to 35% of your minimum amount due. Default in paying your minimum balance can also lead to discontinuance of the card and will hurt your credit rating.

Service tax

Service tax is the tax levied by the card issuer for using their services which is 12.36%.

Cash advance limit

Credit card companies often allow cash withdrawals from an ATM up to a certain limit. The limit can vary from person to person depending upon their individual profile. Use this facility only in emergencies as interest is charged from the date of withdrawal itself. You might find it cheaper to take a personal loan, as these loans are cheaper than credit card debt.

Balance transfer charges

Today banks are wooing customers with the 0% interest balance transfer facility. Balance transfer is the transfer of outstanding debts on one card to another lesser used card or a new one for a nominal interest or 0 interest. What you must know is that this offer is valid only for the introductory period of 3 to 6 months. After this period, the interest will revert to the previous rate that you were paying. Free balance transfers is a trick that card issuers use to get you to switch your cards to them, by offering you a short-term benefit. In the long-term, you are still liable to paying off your outstanding amount, and no amount of balance transfer can save you from credit card debt.

Rewards schemes

All credit card issuers have numerous reward schemes to promote card usage among customers. Each time you spend a certain amount of money, you accumulate some points. These points can be redeemed in return for discounts, products etc. Be cautious and don’t spend on unnecessary products just to gain points. Similarly read the fine print before going in for any cash back offers during festival times. Please be aware that you will not be able to redeem your points as conveniently as you think. Often discounts are available over a limited period of time, or on a first come first service basis.

A word of caution

Be careful when using your card. If you notice anything suspicious, inform your card issuer so they can monitor activity on your card. Under no circumstances should you share your card with someone who you do not trust. Please do not share the security code on the back of your card with anyone. Above all, pay all your dues on time. This is the best way to use your credit cards.

By exercising caution you can make the most of your credit cards. Happy swiping!

Technical vs. Fundamental Analysis

Analysis of financial markets is often divided into two broad disciplines, known as fundamental analysis and technical analysis. Both forms of analysis are different approaches to the decision making process in the context of trading or investing in financial markets.

It shouldn't really be versus one another, it should say instead complement each other. Technical analysis tools can be used to draw significance to various economic trends. Knowing economic trends can aid the technician in determining the potential significance of a various technical signals and patterns. An investor that marries the knowledge has a strong sense of the market. The common thread between technical and fundamental analysis is the study of trends.

Where technical analysis is the study of trends in price and volume, fundamental analysis concerns itself with economic and corporate growth trends and the projection of performance based on trends of relevant factors. In laymen language, fundamental analysis suggests which stock to buy, while technical analysis suggests when to buy it.

The basis of all long term trends in price and volume for any tradable is fundamentals. Technical analysis thrives on the study of changing supply and demand patterns. In the study of trends it is important to determine significance in changes in underlying perceptions of value that result from fundamentals and the forecasts of future performance. A balanced understanding of the two disciplines can provide an excellent basis for a successful trading experience.

As with technical analysis, there are many fundamental tools that are purposed toward early identification of trend reversals. Technical analysis will be used as part of the decision-making process in investing or trading in shares. It will be used primarily to assist with the timing element of the process, where an investor or trader seeks to:

• Identify the beginning of an up trend in a stock
• Buy a position in the stock
• Identify the end of the trend
• Sell the position

Analysis of financial markets is often divided into two broad disciplines, known as fundamental analysis and technical analysis. Both forms of analysis are different approaches to the decision making process in the context of trading or investing in financial markets.

It shouldn't really be versus one another, it should say instead complement each other. Technical analysis tools can be used to draw significance to various economic trends. Knowing economic trends can aid the technician in determining the potential significance of a various technical signals and patterns. An investor that marries the knowledge has a strong sense of the market. The common thread between technical and fundamental analysis is the study of trends.

Where technical analysis is the study of trends in price and volume, fundamental analysis concerns itself with economic and corporate growth trends and the projection of performance based on trends of relevant factors. In laymen language, fundamental analysis suggests which stock to buy, while technical analysis suggests when to buy it.

The basis of all long term trends in price and volume for any tradable is fundamentals. Technical analysis thrives on the study of changing supply and demand patterns. In the study of trends it is important to determine significance in changes in underlying perceptions of value that result from fundamentals and the forecasts of future performance. A balanced understanding of the two disciplines can provide an excellent basis for a successful trading experience.

As with technical analysis, there are many fundamental tools that are purposed toward early identification of trend reversals. Technical analysis will be used as part of the decision-making process in investing or trading in shares. It will be used primarily to assist with the timing element of the process, where an investor or trader seeks to:

• Identify the beginning of an up trend in a stock
• Buy a position in the stock
• Identify the end of the trend
• Sell the position

How about your Investment IQ?

I scored 16/20 in the Investment IQ test by MoneyControl !! I would have scored less than 10 some months ago before I started this blog. :)

Use this tool to evaluate whether you should manage your investments yourself or whether you should approach/ use a professional manager.

This evaluation will consider your temperament, aptitude and technical knowledge. It should take you between 5 and 8 minutes to answer the 20 questions.

Scores on temperament(5), aptitude(5) and technical knowledge(10) are taken. The qualifying score( 15) is a Moneycontrol recommended benchmark and it refers to the minimum you need to score if you want to manage your money independently.

As I said, I wouldn't have scored 16 if I was not doing this blog. In fact I was very miserable with all this personal finance. But I have learnt that finance is not rocket science and I owe it to my family that I manage our finances better.

Maybe you score less than 15. But does it mean you should start finding a professional manager? Or should you try and build your financial literacy levels. Choice is obviously yours!!

CAPITAL GAINS TAX

Capital gains
Incomes such as salary, rent and business income are regular and recurring incomes. These are earned in return for providing a particular service such as skills in case of the salaried, professional service or service in the form of permission to use property. However, these do not cover all sources of income. Incomes can arise out of the sale of capital assets such as your house, jewellery, land or even equity shares and mutual fund units. The profits that you make on such sale transactions will be charged to tax as capital gains.

Short term and long term asset

Asset	Short term	Long term
Equity shares, mutual fund unit,zero coupon bond	Held for 12 months or less	Held for more than 12 months
Other assets like jewellery, land, property	Held for 36 months or less	Held for 36 months or less

Tax treatment

The tax treatment is different for short term and long term as also for some instruments such as equity shares and equity mutual funds.

Short-term capital gains tax

Short-term capital gains are added to the total taxable income of the individual and therefore taxed at the relevant tax slabs. The gain in this case is simply the difference between the cost of purchase and the sale value of the asset.

Exception: In case of equity shares and equity mutual funds, short-term capital gains will be taxed at a flat rate of 15%. So instead of including this income to the total taxable income, the tax will be calculated and added directly to the total tax liability.

Long-term capital gains

Long-term capital gains are taxed at a flat rate of 20% irrespective of your income slab. However, there is an added benefit of indexation, which is available only on long-tem capital gains. Indexation is nothing but adjusting the cost of purchase of units to the cost inflation index as on the date of sale.

Indexed cost is calculated with the help of a table of cost inflation index that is provided by a notification in the official gazette each year. In the case of long-term holdings, the cost of purchase is adjusted to the present inflation index before deducting it from the sale value. So if you had bought debt mutual funds in April 2001 at Rs. 5,000 and sold them in August 2002 at Rs. 10,000, your cost of purchase will be adjusted to inflation. The inflation-adjusted cost would thus work out to Rs. 5,246. So your capital gain will be Rs. 4,753 on which you will be taxed at 20%.

Exception: Equity shares purchased after 1st March 2003 and equity mutual funds bought after 1st October 2004 are exempt from long-term capital gains tax. The intention is to encourage long-term savings in equities.

Another exception is in case of non-equity mutual funds, you will have an option to forego the benefit of indexation and pay long-term capital gain tax at 10% instead of 20%. Which option is more beneficial can be determined on a case-to-case basis.

Exemptions

Sale of residential house

If you have sold your residential house property for a profit, you will get some relief on the capital gains tax payable, if you fulfill certain conditions. Following are the conditions:

1. The house that you sell must have been owned by you for at least 3 years, which means it necessarily must be a long-term asset

2. Once you sell the house, you should buy a new house within two years from the date of sale. Alternately, if you have bought a house within one year before the sale of the existing house, you will be eligible for tax relief. If you are constructing a house, then you should do so within 3 years from the date of sale

3. The cost of the new house should be at least equal to the capital gain

Case study

Ashok Pai bought a house in November 1984 for Rs 5 lakh. He sold the house on 1st April 2003 for Rs 25 lakh. Thus, the long-term capital gains tax on this will be:

Sale value Rs 25 lakh

Indexed cost of
purchase

Rs 5 lakh X 463 / 125 Rs 18.52 lakh

Capital gains Rs 6.48 lakh

In order to save tax on this amount, Pai must buy a house within two years from 1st April 2003 or construct a house within 3 years from that date. He must buy a house of value at least of Rs 6.48 lakh. Had he already purchased a house before selling the existing one, he should have done so during the period from 1st April 2002 to 1st April 2003.

Sale of any long-term asset

Sections 54EC provides exemptions on fulfillment of certain conditions. If you sell long-term assets and within six months, invest the sale proceeds in bonds of NHAI or REC (bonds of NABARD, NHB and SIDBI were earlier allowed but have been disallowed with effect from Finance Bill 2006), then you will get an exemption of either the invested amount or the capital gain amount, whichever is lower.

So suppose you have sold the units for Rs. 20,000, and the capital gain amounts to Rs. 12,000. If you invest the entire Rs. 20,000 in bonds as specified, your entire gain of Rs. 12,000 will be exempt. If you invest Rs. 9,000, only that much will be exempt from tax and Rs. 3,000 will be taxable.

Provisions of section 54ED have been abolished with effect from Finance Bill 2006.