Difference between Revolving Credit and Overdraft

While reading about credit cards, you might have come across the term revolving credit often. Today I will try to explain what revolving credit is and how it is different from overdraft facility.

Revolving Credit or Revolver

Think of a scenario wherein you are allowed to take a loan amounting to a specified sum from a bank in lieu of a commitment fee. But, you have an option to select the number of installment payment cycles as well as the installment amount in each of these cycles. Isn't it a dream come true for any debtor? I think yes. And this is exactly what revolving credit is. This loan can be withdrawn, repaid, redrawn any number of times until the contract ends. Sounds familiar?? Yes, Credit cards are examples of revolving credit.

In this facility, banks determine the maximum limit of credit facility to be provided to an individual or corporation depending on their credit worthiness. Once this upper limit has been finalized, the bank enters a contract with the borrower, wherein the borrower agrees to pay off this loans and interest rates (if applicable) during the contract term. The borrower can withdraw loans any number of times and pay them off depending on his capabilities anytime. This repayment too can be partial or in full and depends on the borrower. The available credit is directly dependent on the amount of money borrowed and subsequently repaid.  Small businesses use this facility from lending institutions for financing their capital expansion needs or to help them during rough financial periods.

Caution: Higher interest rates and penalty charges may be applied under some conditions.

Bank Overdraft

In bank overdrafts you are given the facility by the bank to withdraw a sum over and above the balance available in your account. In return of this withdrawal, the bank charges a fixed interest and you have to repay the amount due within a year. Above the interest, banks can charge you an annual overdraft fee as well. Having overdraft facility will ensure that the check issued by you doesn’t bounce as bank will take care of it. In other words we can say that bank overdraft is when the account balance becomes negative.

Revolving Credit vs Overdraft

In revolving credit, the biggest benefit one gets is that he can take a loan anytime, anywhere without going through the hassle of applying for it each time. You can use this facility for any purchase, small or big. But with all the benefits of “revolver”, you also have to take care of one of the biggest hazard of such type of lending – the terms of credit are never clear or fixed. You need to really dig into the terms and conditions section to ensure that you don’t get a rude shock later on. In case of overdraft, all the terms are pretty straight forward with respect to interest rates and annual fees agreed upon upfront with no unnecessary clauses.
Overdrafts are a far better and easy way to be in control of your expenses as against the temptations of revolving credit.

Bottom Line: Both revolving credit facility and overdraft facility are good for people to keep their finances in control. While organizations and small businesses prefer overdrafts, retail users go for revolving credit.
Before finalizing which one to get, read all the terms and conditions and seek help from your financial adviser.

Fun Fact: Revolving Credits are also known as ‘evergreen’ loans.

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How Do Credit Cards Affect Credit Score

“Back in 2007, when my Uncle Tom decided to buy a dream retirement house in countryside, he approached a local banker. Being a decent earning executive, he still had 10 years for retirement. To his utter shock his loan application was rejected on the grounds of no credit history. Shocked, he approached the banker and explained he never felt a need to take loan or credit card in the past as he always lived within his means. The banker understood his concerns but was bound by credit rating guidelines and could help him much. ”

This might not be the story of many people now days, given the bunch of credit cards we carry in our pocket. But this does portray the relationship between credit cards and credit scores. Having a credit card is a double-edged sword which can make help you build a good credit history but at the same time it can even ruin your score in case you don’t make few of the common credit card mistakes.

Banks and Credit ratings 

When you apply for any loan, credit checks are done to calculate your eligibility to repay it. In order to determine your potential to do so, they check your credit history of repaying previous loans. Timely payment of your previous loans will certainly help you get a few good points. Source of regular income is also one of the major factors which are taken into account while approving your loan application. Similarly Credit card payment history too plays major role in your credit history.

How credit cards impact your credit scores

All the major credit rating agencies collect your lending history from major banks and then apply a trade secret formula to come up with your credit score. Credit cards form a major component of your score as it shows how you handle your debts and borrowings. A good credit score will not only get you best possible interest rate deals but will open avenues for various types of loans.

Time span of credit History
Whether your credit history is good or bad, its time period is considered in your score. A longer good history is always preferred by lenders.

Too many credit requests can damage your score
Studies suggest people who look for credit options often are more likely to get into tough financial situations. In case you don’t need cash for urgent news, it’s better to use your credit cards sparingly.

Lower the credit utilization better it is
A credit utilization ratio is comparison of credit used and total credit available on card.  Lower the credit utilization ratio the better it is as far as credit score goes. For example you have credit of $2000 on $4000 credit limit card; your utilization ratio will be 50%. At the same time you decide to get another card of same $4000 limit, and you buy nothing new using it, then your ratio will drop to 25% which is good. You can use this technique for few cards in order to get your score levels to soar up to certain limit.

Giving away old credit cards won’t do much good to you
By surrendering your old, rarely used card you are not going to your scores much favor as your credit utilization ratio will rise. So instead of returning the card you may just keep it away and stop using it completely.

Late payments or high balances will damage your score
As I said you are carrying a double edged sword in the form of credit cards, don’t let yourself get burdened by such a heavy debt that you are unable to pay it off. Late payments ruin your credit scores to a great extent and are a blotch in your credit history.

As the world recovers from sub-prime crisis, credit rating parameters will undergo further scrutiny from lenders and will become stringent. It is advisable to be cautious and take necessary steps to control the damage done in past rather than regretting it later with respect to credit history.

Don’t be afraid of a small plastic card sitting in your pocket but at the same time use it well to get the best benefits and deals available.

Read More:
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Tips to save money on Grocery Bill
Revolving credit v/s Overdraft
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12 Common Credit Card Mistakes You Should Avoid

While busting shocking common myths about credit cards, I had discussed how a lot of apprehensions one has, are unfounded.  Credit card enables safe and convenient option for payment of goods and services, both offline and online. Also, at the same time, contrary to general belief, it gives us an opportunity to increase our credit score. Not to mention various rewards and discounts credit card owners get at popular shopping joints.
Now if you have decided to get a credit card, you might feel quite empowered and rich. To bust your bubble a bit, today I will discuss a few common credit card mistakes you should avoid.

1) Collecting Credit Cards
This is probably the most common mistake so many of us are guilty of making. After initial apprehension with respect to plastic money, we go on a hunting spree and collect as many credit cards as we are eligible for. I have seen people flaunting their cards as trophies.
But we forget credit cards are not a source of income and each card comes along with an annual fees amount. Having a lot of credit cards can have a negative impact on your credit score. Also note that during dire situations wherein you are under a lot of debt getting a new one won’t be a solution; in fact you should rather find a way to pay-off your bills as soon as possible.

2) Getting greedy for awards
Often people keep on collecting cards from different banks because of rewards and discounts each one provides. But don’t forget nothing in this world comes for free and more often than not banks are the ones who are getting better deal out of every transaction you are making.

3) Considering introductory rates as permanent
Often in order to lure you into buying a card, banks offer a period of low interest rate (also called teaser rate period). This period might range from 3 months to up to a year. Remember these rates are not permanent and will change once specified period gets over and real rates are way too high. It’s advisable to pay off your due during this period otherwise all the outstanding debts will be charged with retroactively applied interests from the date of purchase.

4) Ignoring terms and conditions section
Yes I too have been guilty of blindly signing off various policies without reading all the text under terms section, but have learnt my lesson well now. Don’t make this mistake because often, the devil is in the detail and bankers thrive on this mistake of ours. They often get away from tough situations citing those “microscopic” paragraphs at the bottom of application document. Read all the sections well before accepting them and ask the agent if you need any clarification.

5) Making only minimum payments each month
Yes, banks offer you an option of paying part of money due each month rather than paying off the debt completely but this doesn’t mean you intentionally just pay-off only the minimum amount. You are charged interest on the outstanding amount and if you continue in same fashion you would end up paying more interest than the value of your purchase.
Credit card blunders that affect your credit score, ratings, loans
12 Common Credit Card Mistakes You Should Avoid

6) Paying your bills late / missing payments
This is the cardinal sin as far as card payments go; in case you are doing this, be ready to face the consequences. Not only will you have to pay heavy late payment penalty, but your credit score will also decrease substantially. In fact it is this point which should raise the alarm and you should get your act together before you ruin your future borrowing scope completely.

7) Not Keeping a tab of your monthly statements 
Don’t turn a blind eye to your monthly credit card statements. This will make you know where you are over-spending and in current scenario where Identity Theft is prevalent, you can catch the fraudulent behavior by checking statements thoroughly. Make it a practice to cross check every monthly statement you receive and keep a note of your spending.

8) Letting your credit limit exceed
Unless you want to embarrass yourself in front of strangers and face the rejection at cash counter, spend within card limits. And the best way to achieve this is by keeping a tab of your account and being judicious in your spending habits.

9) Buying items you don’t really need
Studies on consumer behavior, over the last decade, have shown that people spend more while using credit cards as compared to when they use cash. The reason behind this behavior is that, psychologically we don’t feel the pinch of money leaving our pocket when we use card for swipes. Don’t fall for this irrationality of our behavior and avoid spending on unnecessary items.

10) Using credit card for withdrawal of cash
Still a large number of people use credit cards as debit cards at ATMs. STOP this right away. Any cash withdrawal from credit card is considered as cash advance by banks. Cash withdrawals can be considered as short term loans and they attract high interest rates. Use debit card for withdrawals save yourself from paying extra money to banks. Read more about revolving credit and bank overdraft.

11) Treating foreign transactions as domestic ones.
Note that each bank and card has different exchange rates and transaction fees for foreign transactions. So while travelling abroad check which card gives you the best deal and use that card.

12) Lending your card or sharing its number with others
Would you give a blank signed cheque to anyone? I think not. So how can you give your credit card or share its number with anyone? No matter what the situation is, don’t share your credit card details with anyone whom you don’t trust blindly. With the increasing number of financial frauds this is the very least you can do to safeguard yourself.

Finally, after busting a few common credit card myths today I have warned you about top 12 credit card mistakes you should avoid. Do take care of your hard earned money and be informed. J

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How to Save Money on Groceries: Mother’s Guide

Standing at the cashier counter of a grocery store I was startled when he called out my total bill amount. Over the past few years we were struggling to cut down our expenses as we were planning to buy a new house. The cashier’s call made me realize that a big chunk of our monthly expenditure is our grocery shopping. But at the same time we do realize we can’t compromise on our health in order to save some money. Pondering over this issue I approached my mom for advice, she has been managing the finances of her house brilliantly over the years and is known to have a good financial sense.

She gave me some very useful tips on how to save money on groceries which have served her well over the years. Today I will be sharing these simple tips which brought down my own grocery bill down by 35%.

Preparations to be done before visiting grocery shop: 

1) Make an expenditure estimate
No one is a better judge of your earning and spending scope than you are. Before you hit the local grocery shop make a plan of amount of money you can afford to spend on grocery per month, per week. This is not to say that you should make any compromise on your health but having a rough estimate is not a bad idea. You can then set your spending goals.

2) Plan your menu for a week
After estimating your expenditure, you can proceed to make a rough plan of menu for coming week. This will enable you to get a rough idea of what all grocery items you would be requiring and you won’t land up buying unnecessary items.

3) Always try to shop for a week at least
The benefit of having a week’s list ready is that you will not only save on groceries, but will also save on fuel and time by avoiding frequent visits to store. Always try to shop and store for longer duration.

4) Clean your fridge or grocery cabinet once a month
You never know what food item or even a loaf of bread is sitting in the corner. When I started this practice of cleaning my cupboard, I was surprised to see various small sachets of spices and oils which I had bought long back and somehow couldn't find whenever I needed them. Now not only I have to shop for lesser items but also have a cleaner kitchen.J

5) Visit Farmer’s market 
Most of us city dwellers have abandoned farmer’s markets for fancy and expensive shopping malls for our grocery needs. If you are really serious about cutting down your grocery expenses you should probably think of paying a visit to local farmer’s market at least once a month. Farmer’s market offers fresher as well as cheaper alternative to local brick and mortar mall.

6) Eat before you shop
After all preparations have been completed; it’s time to have to fill your stomach. Various psychological studies have revealed that people who shop for eatables empty stomach are more likely to buy junk, unhealthy food. I too can say it from my personal experience that when I started shopping with a full stomach, I was able to resist he temptations of throwing in the extra pack of chips or cake in the cart.

7) Shop from familiar shop
Now you are ready to hit the road and shop for your coming week’s menu.  Drive to a familiar grocery shop where you are aware of where exactly you can find what you have listed. This way you would avoid wandering and overlooking unnecessary (and tempting) items as well as save your time. The more time you spend in the store, the more you waste your money on buying stuff which you may not necessarily need.
How to save money on grocery : Mother's guide

Tips to be followed once you are in the grocery store:

8) Stick to the list:
I know it’s tough for shopaholics like me, but refraining yourself from buying extra eatables would not only be good for your pocket but as well as your health. I had tough time doing it at the starting but now it has become a habit, and a good one. J

9) Buy only grocery from the grocery store:
Avoid the marketing trap laid down by shop owners and buy only grocery from the store. Now a days you find grocery shops stocking various gift articles, personal care items; this is their trap. These items are not only expensive but are basically aimed at taking advantage of our laziness. Besides remember these items don’t figure on our list as well so AVOID them.

10) Buy Generic products
Generic products are usually very cheap as compared to branded ones and are still as healthy. Just because you don’t have top celebrities on the packaging of generic products doesn’t mean they are inferior; as far as their health benefits or usage goes. Avoid brand names especially while buying items like flour, sugar, salt etc. You can easily save up to 40% on your bill by going generic.

11) Bulk Shopping is cheaper
As we have made a list of items you would be requiring over next week, you can afford to go for bulk shopping and save a lot on wholesale deals. Especially for items which don’t get spoiled over long durations can be bought in bulk and stored at home. There are always some wholesale deals for stuff which can take advantage off, instead of going for pricey small packets.

12) Calculate Prices
When I said got for bulk shopping, I assumed that there might be a better deal if you buy a bigger pack rather than a small sachet; which usually is the case. But recently I found out that marketers of some big brands too realize this myth or assumption we carry while buying bigger packs. They have now quite intelligently made small sachets cheaper. So be cautious and don’t fall for the age long assumptions we have had. Calculate your own prices and then take a decision judiciously.

13) Go for smart healthy alternatives  
Organic food is usually cheaper and has more health benefits as compared to packaged branded utilities. Similarly seasonal fruits and vegetables are better choice than off-season cravings which you might have. Having cheaper food doesn’t mean settling for unhealthy stuff, rather it means having food which your body really needs.

14) Buy more fresh fruits and vegetables
Avoid being lured by fancy packaging of processed tinned food, go for fresh raw fruits and vegetables. Agreed, the packaged ready to eat food is easy to make and saves a lot of time, but fresh fruits and vegetables are lighter on pocket and are healthier alternatives. No matter what the label says, a fresh orange is any day better and has more nutrients than bottled orange juice.

15) Take advantage of Sales, Discounts and Coupons
Every month there is some or the other offer or discount season at your favorite grocery store, use those opportunities to buy stuff you might require over a period of time. Also, you may use coupons to occasionally fulfill your craving for unnecessary yet tempting box of chocolates or ice cream.

16) Avoid buying stuff at checkout counter 
Items and discounts near the checkout counter are a big NO-NO. They are kept there just to make you forget your needs and give in to your shopaholic instincts. Avoid buying any fast food just near the exit door, relax you would be home soon.J

Last but the BEST:   Always buy stuff which you really need and don’t be swayed by discounts and sales on unnecessary items.

Happy Healthy Shopping!!! And Share this with your friends J

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12 Common Credit Card Mistakes You Should Avoid
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Shocking Myths about Credit Cards

Copyright © ianswer4u.com

6 Common Myths about Credit Cards

A credit card is a financial instrument issued by a bank which enables you to borrow short term money at the point of sale. To put it in simple terms, it is a plastic payment card issued to you by a bank which enables you to buy anything on credit. You can also consider payments made by credit card as loans which are interest free for limited period (usually 30 days), and afterwards if u fail to pay off your debt, you are charged interest of 16-20%.

21st Century is the generation of plastic money; credit card services are one of the most profitable services for banks now days. Unlike older generations, youngsters flaunt the number of plastic cards in their wallet instead of currency notes. I am sure most of you also may have joined the same bandwagon by now and for those like yours truly, who are still pondering whether to get a credit card or not, today I will attempt to debunk shocking common myths regarding credit cards.

Myth 1: A new Credit card will reduce your Credit score

The biggest myth surrounding credit cards is that getting one lowers your credit score. No it doesn’t. Credit score is based on your ability repay the borrowed money and your past history of payments is also considered. If you haven’t taken any loan or have owned a credit card how are they going to determine your credit history??? Thus you need to understand just getting a credit card doesn’t in any manner lower your credit score. But non payments of your due on time may certainly hamper your score.

Myth 2: Returning credit card will improve your credit card

Related to the first myth, is the general belief that returning your credit card will drastically improve your credit score. Again, people are falling for this myth because they fail to understand the concept of credit score. If you have paid your due credit bills on time you will be better placed in creating a good credit history. This way you are better placed to increase your score with a credit card instead of not having it or returning the one you already own.

Bottom-line: Again I would like to emphasize that not defaulting on card payments is better than running away from credit card based on some hearsay.

Myth 3: Rewards with credit cards are “rewarding”

Now we move to the aspect with which banks used to lure us into buying credit cards. Every day we come across advertisements and banners telling us that a credit card of XYZ bank can get you discounts in your favorite mall or shopping site. Such ads are too tempting and make us think how much we could have saved in case we had some of those plastic cards with us. Tempting idea?? Certainly it is. But in reality many of the card holders agree that the devil lies in the detail. There is always that dreaded asterisk symbol about terms and conditions. A lot these offers are dependent on you buying some other stuff or are applicable only during non-peak days. Also these rewards are for people who pay up their dues in full and on time by the end of 0% period.

Bottom-Line: Don’t get a credit card just based on rewards and offers. Check other terms as well and compare it with those given by other banks then take a final call. Sign-up bonuses are not always a trap but a little bit of caution from your end won’t hurt you in long run.
Common Credit Card Myths, Credit score

Myth 4: Paying up the amount due every month can improve credit score drastically 

Won’t it be great if it was true that paying off your debt every month for a year could make your credit score shoot up? Sadly it’s not so, but yes missing even one payment will reduce your score to a greater extent. Getting a good credit score is the result of long term good credit behavior exhibited by you and overnight you can’t increase it. This doesn't mean you shouldn't pay off your due amount regularly, you should do it to maintain a good rating and saving yourself from pretty heavy penalties and interest rates that are charged.

Myth 5: Paying up minimum due is enough 

The best strategy as far as payment of due goes is paying as soon as you can before the 0% grace period gets over. But there is a certain section of people who believe in paying just the minimum due every month in order to maintain their card. This way they become eligible for high interest rates. Mind you the interest rates charged by banks is calculated on daily basis and is very high. Thus unless you are really in financial crunch you should strive to pay off all your dues and not just the minimum due.

Myth 6: Exclusive credit cards don’t have spending limit

Just yesterday I received a call from bank tele-marketer telling me that I am eligible for exclusive Signature card. His marketing pitch was that besides multiple rewards I would be having unlimited spending limit. This sounded too good to be true so I asked him to send me the complete brochure of the signature card. A thorough look at the document revealed that Signature card didn’t come without a spending limit, though it did had a quite a high limit.

Don’t be fooled by the advertisements, each card whether Black, Blue, VIP, Platinum or Signature comes with a credit limit. Don’t go on shopping spree even if your card has a high limit because at the end it will be you who will have to pay for it.

Banks love credit card holders. Some pay high sum as interests while others get them money from merchants by shopping with them exclusively. Thus search and compare all the credit cards you are eligible to have and read the fine print well. In case you have any queries regarding it, ask your financial adviser or write to us.

Read More:
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Common Credit Card Mistakes
Difference between revolving credit and bank overdraft
How your credit ratings are affected by credit cards

  Copyright © ianswer4u.com