Why is the credit card popular?
The credit card is a popular way of spending money on shopping and other purchases. These cards issued by banks and other financial institutions allow you to spend first and then pay later. This is what makes it highly convenient. You get sufficient time (usually 30 to 45 days) to pay the amount you have spent. The reason for the popularity of credit cards is that even if you do not have money in the bank, you can still spend it using your card.
All you need to do is pay the minimum amount due every month. For example, you may have spent 1000 using your credit card. You need not pay the entire amount, you can only pay the minimum due, which may be 20 or 30. You can keep paying the due amount every month until the payment is complete. However, you need to keep in mind that you would be charged interest if you don’t pay the entire credit card bill within the 45 days credit period.
The credit card company is essentially loaning you an amount for your needs. The loan is interest-free for a limited duration, after which you need to start paying interest. The interest amount charged is the highest in the market. When you work out the costs, you would realize your credit card spending is too much. The lure of the card though makes you spend every month leading to a huge bill and outstanding amount piling up.
Repaying only the minimum amount leads to build up of a big interest payment. Failure to pay can lead to legal action and can severely affect your credit rating, putting you in trouble if you want a loan later. The solution seems simple – don’t use credit cards! This is not easy as most people find it difficult to balance their budget. Using credit cards would help in managing expenses. You need not give up your credit card but need to know how to use it in a wise way.
The following is information on how your credit card works, what are the rates charged and related information. This would help you plan on paying off your debt easily. Whether you are planning to get a card or already have credit cards, this information would be handy for you.
How the credit card works?
The credit card is where you are loaned money by the card issuer for your expenses. It is different from a debit card, where you are spending the money that you have in your bank account. A credit card gives you a credit limit, which is the upper limit of the amount you can spend on the card. There is no fixed rule to decide the credit limit. It is based on the salary/income source information you provide the card issuer. It is also based on your credit score. Your credit limit can be enhanced based on your card usage.
If you have a credit card limit of 70,000 it means you can spend a maximum of 70,000 at a time. This is the loan you are taking on your credit card. Most credit cards allow you between 30 to 45 days before the bill is generated for the money you spent. They have a billing cycle and a due date, both of which are usually different. The billing cycle may be from 15th of one month to 15th of another. However, the bill would be due on the 30th. Let’s understand what this means.
Understanding the calculations
Let us assume you buy something for 2000 on the 16th of July. On the 15th of August, the bill would be generated indicating that you need to pay 2000. However, you need not pay the amount immediately, you would be given time until thirtieth of August, which is the due date for payment. You need not pay the entire bill amount of 2000 by that date. You can pay just the minimum amount due.
Generally, the minimum amount is 2% or 3% of the bill value. This again depends on your card issuer. 3% of 2000 is 60. So, this is all you need to pay. When you pay 60, you have not cleared your bill in full and hence need to pay interest on the amount. This is decided based on the APR or Annual percentage rate. It could be anywhere from 16% to 20% as decided by your bank. You need to pay 20% interest for2000, until you clear the payment. Let’s look at how the numbers stack up.
Amount spent =2000
Minimum amount to be paid =60
Interest @20% on the amount =400, 33.33 per month
Therefore, for the 60 you pay, 33.33 goes towards interest and the balance 26.67 is repayment of the principal. The balance due for next month is 2000 – 26.67= 1973.33. This calculation is repeated next month to calculate the amount due.
In this way, you would keep paying until you clear the principal and the interest. If you pay only the minimum balance of 60 every month, you would need 15 years to clear the 2000 you took. You would have paid a total 4,241. This means that the interest you paid is more than the amount you spent.
This calculation is for one month’s spending. Next month, you may again spend 2000 and in the next bill, you need to pay 60 for the previous bill along with 60 for the present bill. The outstanding amount keeps increasing as you keep spending. This is a typical debt trap that you can get into if you use your credit card more and pay only the minimum balance. However, it is not necessary that you pay only the minimum balance, you can even pay a higher amount. If you pay 70 instead of 60 in the above example, you can repay your amount due in lesser time. The more you pay each month, the lesser will be the interest you pay overall.
The best way to use a credit card is to pay off the entire balance by the due date. If you have a bill of 2500, pay it off in full. You would then not be charged any interest. This allows you 30 to 45 days of interest-free credit. Instead of spending money from your account, you can spend using your card and pay up after the credit period is over. This allows you to earn interest for 45 days from your bank account. It may be a small amount that you save, but small amounts do count. The best way, therefore, to use credit cards is to clear the bill in entirety.
In practice, this may not be possible. Most people overspend on their credit cards. Even if they do not have money in their account, they spend without worrying about where the money would come from. This leads to an increase in the amount you need to pay. The outstanding bill amount would carry interest. Remember late payment can lead to penalty, which is apart from the interest.
This problem compounds if you have more than one credit card. To get the advantage of an enhanced credit limit, you may apply for more than one card from different agencies. Each card may have a limit of 70,000. So, you can spend 140,000. If you use the entire limit, you would have to pay an interest of 2333.33 every month. Most people do not make this calculation. They spend recklessly and realize what they have got into only when the bill amount starts spiraling out of control.
It is also possible that the minimum amount you need to pay can increase. This may happen for any one of the following reasons:
- You missed a payment or paid less than the minimum balance, leading to a penalty being charged.
- You owe more as you have spent more.
- You crossed your credit limit and hence are charged a penalty.
- The card company has increased the interest rate.
If you are caught in such a situation, where your outstanding amount is higher than you can afford, then this is a situation that calls for immediate attention and action. Remember, non-payment of the minimum balance would lead to a penalty, which keeps shooting your monthly bill up. If you don’t pay, your credit ratings are lowered and you may be sued by the card issuer.
So, what do you do in such a situation? Here are some ways you can clear off your credit card debt.
1) Calculate the outstanding due
You need to calculate the outstanding amount from your present bill for each of the credit cards you own. You can even access your credit score report to get a clear understanding of how much you owe. Once you know the amount that needs to be paid, you can plan how you to pay it off. You would have other expenses too. So, you need to work out how much money you can spare to clear off your debts.
2) Lock up the cards
If you are in big debt, then you have no option but to stop using your cards. Lock them up so you don’t have easy access to them and are not tempted to use them. Spending using a credit card can be addictive. When you already have a big debt to pay off, using your cards again can be disastrous. How much ever it is difficult, stop using your card.
3) Cut expenses to generate money to pay your debt
It may be difficult to increase your income to generate money to pay your outstanding. The only option is to reduce your expenses. It is not difficult, you just need to do it in a planned way. Until you clear off your debts, you can drastically cut down on your eating out, movie watching, and mall visits. You can go through your monthly expenses and look at how you can reduce them. Look for places where you get discounts on your groceries. Every single penny you save is important. You can use the saved money to pay off your debts. Once you are debt free, then you can return to your life of comfort. Until then you need to make sacrifices.
4) Use the avalanche method to pay off debts
The avalanche method can be used if you earning more than your debts. Here you would first clear off outstanding on the card that charges the highest interest. Once you are done with that, you can then turn to the card that charges a lesser interest. In this way, you build up on your payments, until you clear it all.
5) Try the snowball method
The snowball method is slightly different. Here, you would pay the minimum amount on all your cards. You would then use the remaining money to pay off the card that has the least outstanding. Once this is done, you pay off the next card with the lowest amount due. You would continue this until all the payments are made.
6) Use a balance transfer card
A balance transfer card is a credit card that offers 0% interest. This would not be forever, but for a limited period of time. Once you get such a card, you can transfer the due amount from the other cards. You would have to pay a transfer fee, which may be around 3%. Once you transfer the amount to the new card, there is no interest to pay. This will help you quickly clear the principal amount. You must note that that 0% interest is for a limited time, you need to take advantage of this and clear off your debts during this time.
Use any of these methods to clear off your debts so you can be debt-free. The credit card is a boon, but if not used properly would turn out to be a curse.
Can companies really afford to WFH?
By Carmen Ene, CEO of 3StepIT.
Firms scrambled to enable Working from Home (WFH) at the beginning of the Covid crisis, but ten months on, corporate IT strategies are becoming far more challenging as new work patterns emerge.
Recent research from 3stepIT confirms that technology investment over the next 12 months will be heavily influenced by the changes required to manage the Covid-19 pandemic and support a new-look mobile workforce.
Almost a quarter (24%) of 2019’s annual IT budget is set to be swallowed up by remote working demands. At the same time, with 29% of desktops sitting unused in deserted offices, companies are having to accelerate the retirement of IT equipment, raising serious questions regarding the security and legitimacy of asset disposal strategies.
The implications are stark: in a bid to support the requirement for flexible working, companies risk jeopardising other strategic IT investments that could be key to delivering the agility required to survive the pandemic.
As Carmen Ene, CEO at 3stepIT insists, a more affordable and sustainable technology acquisition model is required.
New Working Environment
Covid-19 has driven an acknowledged shift to WFH, but the new working environment is far more nuanced. Government policy continues to shift. Working in the office was encouraged for a few months in the bid to reinvigorate the urban economy; now we are back to WFH. The day-to-day experience for the majority of working adults continues to chop and change.
The business implication is also varied, with companies enjoying different levels of employee productivity. According to the Office for National Statistics (ONS), while around half of companies have seen no difference in productivity, nearly a quarter said it had fallen.
Just 12% have seen an increase in productivity. The Bank of England’s Chief Economist has recently commented that WFH risks stifling creativity and cuts people off from new experiences.
Despite the challenges for businesses and employees alike, the WFH trend is set to continue. A survey from the Institute of Directors confirmed nearly three quarters (74%) of company directors plan to retain increased home-working post-coronavirus – whenever that may be.
This attitude is confirmed by research from 3stepIT which reveals 60% plan to allow employees/more employees to work from home and 56% to offer more flexible working hours.
The question for businesses then is how best to achieve this new flexible employment model, especially given the continued economic uncertainty and the many demands on the corporate budget?
The initial response from many companies to enable WFH was impressive – companies of every shape and size closed the doors and embraced remote interaction. Hastily allocated laptops and video calls addressed the immediate challenge.
As the pandemic rolls into month ten and many nations enter lockdown two, organisations are facing up to the reality of increased investment needed to fuel a mobile workforce for the long-term, as well as an urgent review of the temporary and emergency technology packages that were put in place to enable home working.
For many companies, this will demand a significant and unplanned upfront cost, potentially draining company cash reserves when they can least afford it.
Almost half (47%) of businesses in Europe expect to increase investment in remote working over the next 12 months, with IT strategies becoming increasingly focused on facilitating social distancing (47%) and increased home working (46%) to reflect the changing needs of employees.
The need to allocate investment to support a remote workforce is unquestionable. Yet there are many other immediate priorities facing IT budgets as businesses work hard to adapt to extraordinary change.
From the physical events that have gone virtual to supply chain challenges and the sheer uncertainty of demand in every market, technology has a vital role to play in enabling agile business.
The majority (61%) of IT decision-makers expect IT budgets to rise next year but with the shift to home working demanding nearly a quarter of annual budgets, funds will have to go much further than before.
How can companies support the investment in technology required to enable secure and productive remote working without compromising on short-term capital investment in essential digital transformation projects?
New thinking is required, however the value of financing rather than purchasing IT equipment outright has been proven over the past few months.
89% of companies already using finance to acquire some or all of their assets have been able to make investments in additional IT hardware to enable employees to work from home, and over half (54%) are more likely to use finance to acquire assets over the next two years.
A growing number of companies are starting to realise that access to technology is more important than ownership.
Technology Lifecycle Management
It is important to recognise, however, that finance is just part of this equation. The pandemic may have forced companies to accept flexible working on a scale previously deemed impossible, but there are still significant challenges for IT management to address.
The initial equipment acquisition is, in many ways, the easy bit. What is the strategy for remote support, which is critical if employees are to be productive? How will aged equipment be securely retired and disposed of when employees rarely, if ever, come to the office? How do you keep track of where devices are and if they’re in health?
Effective remote working requires a comprehensive Technology Lifecycle Management model that supports the business from acquisition through support to disposal.
With flexible working here to stay, IT managers have an ever increasing list of demands – and a need to demonstrate the value of every expense. The widespread adoption of WFH is not the only dramatic shift in strategic approach precipitated by Covid-19 – there has also been a change in attitude towards IT device ownership.
Focusing on providing employees with secure, effective access to technology rather than owning it, provides IT managers with a chance to not only release essential capital budget but also manage the IT lifecycle more efficiently and sustainably.
FICO UK Credit Market Report September 2020 Shows Card Spend Rise Stalling
Analysis based on UK card issuers’ data also shows high level of unused credit could be a risk as festive spending may be an antidote to a year of woes
- Average spending on UK credit cards levelled after previous months’ increases; rates of one missed payment fell
- Rate of two missed payments continued to grow and September saw first increase in three missed payments since April 2020
- September was second consecutive month to see increase in average interest charged
- Percentage of payments to balance exceeded September 2019 rates
- Cash usage continued to increase
London, November 19 2020 – Global analytics software provider FICO today released its analysis of UK card trends for September 2020, which shows the continuing impact of COVID-19 on household finances even while furlough and payment holidays remained in place during the month.
“The big challenge for credit providers right now is understanding the true level of financial difficulty consumers are facing because of the support being provided by furlough and payment holidays,” explained Stacey West, principal consultant for FICO® Advisors. “Our UK card data suggest that many people are becoming more prudent and reducing their card balances, but those who can’t reduce their card use are increasingly struggling.
“The recent announcement concerning the furlough extension and increase in percentage paid, along with the extended payment holidays, will result in increased debt levels being delayed until further into 2021. Christmas spending is likely to add to that longer-term debt burden. Of particular concern is that average balances on accounts missing two or more payments is higher and growing. Cash usage on cards has also increased month on month.”
Spend on UK cards increases marginally
Average spending on UK credit cards increased by only £1 in September to £640. Average spend is now only 2.9 percent lower than a year ago.
“Regional lockdowns and the end of the school holidays appears to have curbed the increase in spend seen over the previous three months,” said Stacey West. “With the introduction of the tier system, with stricter regulations reducing spending opportunities, October could see this stabilisation continue. The early part of November could well reflect extra spending ahead of the month-long national lockdown.”
Monthly payments continue to increase
The percentage of payments to balance increased for the third consecutive month; it is now 2.9 percent above September 2019. This is the first time since April that payments have exceeded those of 2019. The percentage of cardholders paying less than the full balance fell and the proportion paying the full balance increased and is now 8.4 percent higher than a year ago.
“The higher proportion of payments to balance is, of course, good news. Even if it’s a direct consequence of lower balances and the furlough and forbearance arrangements, it is encouraging to see consumers trying to manage their debts responsibly,” adds West.
Two and three month missed payments increase
The one missed payment rates decreased in September after two months of growth. But the average balance on accounts missing two payments is 9 percent higher than a year ago and the three missed payment rates increased for the first time since May, with the average balance 11.3 percent higher year-on-year. There is a segment of customers who could not afford to make their payment in July who continued to miss payments into September. The October data will show if this impacts 4+ missed payment rates.
West added: “Whilst it is positive to see the one missed payment rates falling, the true scale of the debt at risk of being unpaid will continue to be masked for many months due to the announcement of the continued support, extended payment deferrals and the introduction of more forbearance measures by issuers. Enhancing analytics by using better tools and increasing the data available will help issuers effectively identify the customers that need support so that they can communicate appropriately. Open banking transactional data will remain an important source and it is anticipated its use will expand in 2021.”
Unused credit a risk as Christmas approaches
The percentage of the card limit utilised on active accounts reached another over two-year low. September saw a second consecutive decrease in the average card limit to £5,404. While the highest proportion of accounts, 29.3 percent, have a limit in the range of £5,001 to £10,000, the average balance for these accounts is only £1,242. Those with limits of more than £10,000 have an average balance of £2,366.
Exposure on inactive accounts is at 34 percent and 72.3 percent of exposure on active accounts is unused.
“These figures clearly show the level of unused credit in the market. Despite the lockdown Christmas is expected to push spend up and a large proportion of consumers will have existing credit available to use without checks being in place to determine if the extra spend is affordable,” West adds. “Up to 80% furlough payments until at least the end of March, the Job Support Scheme and the extension of mortgage, loan and credit card payment holidays will give some consumers confidence to continue to spend in the short term.
“Higher card debt levels in 2021 is, therefore, a risk and issuers will be taking proactive steps to address this with increased customer interaction to understand the true existing and delayed financial impact. It is likely that digital communication will come more into play as a result. It is potentially easier to ask personal questions and for consumers to respond via digital channels. But this puts the onus on lenders to ensure they have the systems and contact details in place now.” A recent FICO survey showed that nearly one in five Britons say their bank doesn’t have their mobile number.
Accounts over their limit remain stable
September saw a decrease in the proportion of accounts exceeding their limit and this number is 42.9 percent lower year-on-year. However, the average amount over limit started to increase again and is 30 percent higher than September 2019.
Cash spend on cards continues to increase
The percentage of consumers using credit cards to get cash increased for the second consecutive month, after a significant fall during the first national lockdown. Although increasing 2.8 percent, levels are still 53.8 percent lower than a year ago.
This has resulted in a 2.6 percent increase in cash as a percentage of total spend. Both monthly increases were higher than those seen in 2019. However, it may be many months until we see the levels of cash usage reach pre-pandemic levels, and they may not rise that high again.
Bounce back loans will cause bounce in alternative finance
Bounce Back Loan Scheme (BBLS) losses and fraud will see more SMEs turned away from banks, says Steve Richardson, Sales Director at Reparo Finance.
Recent headlines have focused on how payment defaults and fraudulent borrowing through the Government’s BBLS scheme could amount to anywhere between £15bn and £26bn.
The immediate reaction has been that these eye-watering figures, released by the National Audit Office (NAO), will ultimately end-up costing tax-payers. While this is true, SMEs will also pay a high price for this situation.
The SME Funding Gap is Set to Widen
After the financial crash in 2008 and the subsequent recession, we saw a trend of banks restricting lending to small and medium-sized businesses. SMEs were either considered too high risk or low value by traditional lenders. These businesses became the ‘unborrowables’, which has contributed to an ever-growing funding gap when it comes to SME financing requirements. The SME Finance Forum estimated this gap to be around £3.8 trillion globally in 2018.
This funding gap will be accelerated by rock-bottom interest rates, economic uncertainty and high corporate debt. Add to this the costs of unpaid Government bounce-back loans and fraudsters exploiting a lending system more focused on emergency access rather than proper due diligence, and you have a perfect storm that penalises SMEs.
Banks will now make SME borrowing even more rigid as they become increasingly risk-averse towards SMEs. With the ever-changing coronavirus policy, we’re no closer to ‘normality’. In these circumstances, it is much easier for banks to strike a line through SME lending, rather than build a risk-weighted lending model.
Bank Lending May Become a Box Ticking Exercise
Many banks will ignore SME funding requirements by dressing up rejection in the niceties of the Bank Referral Scheme. This redirects SMEs to other lenders with no real appreciation of why the SME applied in the first place.
Perhaps banks will entertain some low level of SME lending as a box-ticking, reputation management exercise. This is likely to be a slow and painful application process for SMEs, which is more concerned with filling out the right forms rather than the lender understanding the people and company seeking finance.
Alongside the banks’ reluctance to lend, there are likely to be logistical challenges. Banks are stretched at the moment, partly from processing government loan schemes and due to other challenges the pandemic has presented. Many banks may not have the resources to dedicate to the tricky business of SME lending.
A Bounce in the Alternative Lending Market
With the backdrop of even less engagement from traditional lenders plus the increased need for funding, SMEs are turning to alternative lenders.
Lending to SMEs is complicated; when financing these businesses, it’s harder to value risk and make lending decisions. Many of the companies have limited financial information, atypical cash flow or operate in verticals that lenders don’t understand.
In many circumstances, the alternative finance market can provide viable alternatives to SMEs. There are an array of lenders that specialise in different products and sectors.
Accessing Alternative Finance
When SMEs start to access alternative lenders, they stand a good chance of finding a lender that will have a product that fits. They will undoubtedly find lenders willing to have a conversation to understand their circumstances.
Whereas once SMEs weren’t clear on the options outside the banks, they’re becoming increasingly savvy about their range of lending options. This has led to the bounce in demand for alternative lenders, which is likely to grow as the pandemic decreases SME lending from banks.
With so many options, an excellent place to start is a commercial finance broker or your accountant. These professionals have access to the alternative lending market and can help you find the right lender.
In a world where traditional lenders may be seeing SMEs as even higher risk, it will be alternative lenders with their broad range of products and willingness to listen that will fill the gap.
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