Tap and Pay - The credit card

Written by - Vibhav Bhat and Yash Prashant Bhave

PGDM Finance- TAPMI, Manipal

A simple tap of a plastic and the payments are done. It’s not the future, it’s the present. Not a single penny debited from account and one of the easiest modes of getting credit for a short duration without interest or mortgage. A credit card. We have heard people talk about why to or not to use credit cards. This article will help you to understand it better.

Evolution of credit card

The first-ever credit card got issued in 1950 by the Diners Club. It is not a credit card but it is a charge card. In that user needs to repay the amount at the end of every month. The first improvement is the introduction of magnetic chip and later on, EMV chip got introduced for security reasons. EMV chip ensures the safety of the financial data of the user.

Source – CreditKarma Source – razorpay

Fig 1- Evolution of credit cards

Here, the first image shows the evolution at a global level whereas the second image depicts the evolution of credit cards in India.

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How it works

Let’s start with a point that a credit card has a certain limit up to which one can make a payment using it. It works just like a debit card but obviously with minor modification. For example, you go to a store and buy goods worth 500 Rs. Now you decided to make a transaction using a credit card. As you give your card to a merchant, he/she will insert that into the POS machine. After that, your card details get verified from the credit card channel to check whether you have a sufficient balance or not. If yes then the transaction gets completed.

Now at the end of the month, you get a statement from the credit card company regarding transaction details. It also includes the due date up to which the user needs to settle up the payment. Let’s introduce a term called a grace period, it is the period between the purchase made and the due date given by the company for the repayment. If the user settles the payment in this period, then he/she doesn’t have to pay interest charges. But if the user carries the balance month to month then needs to pay interest on the balancing amount. This interest rate is called APR (Annual Percentage Rate). This rate gets changed over time as per the credit card act 2009.

Regular and in grace time payment made by an individual is rewarded. Also, keeping a healthy financial credit score helps the user to get a large sum of credit in the future when needed.

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Benefits

We would like to emphasize the point that only thoughtful use of credit card will fetch these benefits. Otherwise, it won’t take much time to get a user into the vicious cycle of interest payment.

Source – Investopedia

Fig 2- Advantages of credit cards

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Disadvantages

With all the benefits, if one does not know how to use a credit card effectively there are bound to be consequences. Following are some disadvantages one should be aware of.

Source – 360 financial history

Fig 3- Disadvantages of credit cards

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Future trends

Credit cards currently not only offer just credit, they offer other benefits attached with them such as lounge access and others. These benefits improve adoption among the customers. Along with rise of digital channels and Covid induced boost to digital ecosystem adoption of credit cards have increased.

The traditional plastic cards are also being replaced. The cards went form swipe to pay to tap to pay. These plastic cards are not sustainable and hence currently the trend is moving towards virtual cards. This allows u to make payments without a physical card.

The credit card industry is changing just like other sectors because of Covid. The future outlook of credit card might be different both in physical as well as in terms of usage. Overall adoption of credit card is the key to improve an individual’s inclusion in the formal credit.