Credit & Debit card: Everything You need to know

18/12/2019

Table of Contents

Credit & Debit card and Case study

About Credit & Debit card

Debit means the removal of an amount from an account. In a book keeping entry, debits are indicated on the left-hand side. Credit refers to the amount received in an account. Credits are indicated on the right-hand side of a book keeping entry. It also means the ability of a customer to obtain goods or services without making an instant payment.

Debit card

A debit card is issued by the bank where the individual has a savings account. Debit cards are also issued to corporate entity. Such cards are linked to the current account.
Debit card is a cash-transaction instrument which can be used to pay for goods and services. When you swipe your debit card, the cash is ‘debited’ from your account. The funds are then transferred to the beneficiary’s account.
You can pay your utility bills, shop online and offline and also transfer funds from your account to someone else’s account. When you need to withdraw money from your account, you can simply swipe your debit card at an ATM.
A debit card is a pocket sized plastic card. Earlier, cards with magnetic strips were issued.
From January 2019, it is mandatory for banks to issue a chip-based debit card. Debit cards with security chip inside them are called EMV cards.
The following details are on the front of a debit card: a 16-digit unique card number, validity and expiration dates, and the logo of the creditor e.g. Visa, Mastercard, RuPay etc. The CVV, signature strip with card-hoer’s signature, and customer services numbers are on the other side of the card.

Credit Card

Similar to a debit card, a credit card is a pocket sized plastic card.
At present, banks and other financial institutions issue chip-based credit cards. The basic details of the credit card holder, credit card number and the expiry date appear in the front. The CVV, the signature strip for the credit card holder and details of customer care centers are on the reverse side.
Each credit card has a pre-approved credit limit. It means that you can make multiple transactions within the approved limit. Credit cards are useful when you want to make a high value purchase but don’t have liquidity.
The used amount should be paid back at a later date, typically within 30 to 45 days, called grace period or interest-free period, from the date of purchase.
Elements on the front side of a credit card

Credit card number
Card issuer logo
Credit card name
Credit card network
Cardholder’s name
Chip on the card
Valid from and Valid thru
Contactless card icon

Elements on the back side of a credit card

Magnetic strip
CVV security code
Signature box
Hologram
Customer helpline numbers

The 16-digit credit card number printed at the centre of a credit card is not just a system generated random number. Each digit or a set of digits of the number provide specific information about the type of card, card issuer, and others.
Digits 1-6 of a credit card number – Issuer Identification Number (IIN)

The first 6 digits of a credit card number including the first digit are called Issuer Identification Number or Bank Identification Number (BIN). They represent the card’s issuing bank. Each bank in India follows a different sequence of IIN numbers. For example, one of the three IIN numbers used by HDFC for its MasterCard credit cards is 531831. Thus, by looking at the first 6 digits of a credit card, one can identify the industry, card network and the issuing bank.

Digits 7-15 of a credit card number – Account number of cardholder

The next 8 digits of a credit card number from 7 to 15 contain the primary account number (PAN) of the credit cardholder. PAN is a unique number assigned by the issuing bank to identify the cardholder, hence is a critical part of the credit card number. These digits are often masked in all the communications by the bank.

Digit 16 of a credit card number – The check digit

The last digit of a credit card number is called check digit because it is used to check accuracy of card numbers. The number is typically generated by applying a mathematical formula called the Luhn Algorithm, which uses the previous digits in a credit card number to get a single digit. The number thus helps to validate that all the digits in a credit card number are correctly entered during a transaction.

CVV security code

Below the magnetic strip is the CVV (Card Verification Value) security code which actually is a fraud-prevention tool. The numeric code is typically required for card-not-present transactions such as online purchases. For MasterCard and VISA cards, the CVV is typically 3 digits whereas for Amex cards it is 4 digits.

Difference between credit card and debit card?

Parameters	Debit Card	Credit Card
Issuer	A debit card is linked to your savings or current account. It can be only issued by a bank where you have such an account.	Credit card from a bank without opening an account.
Source of funds	Debit card transaction uses the funds available in your current or savings account for making transactions. The amount is debited from your account on a real-time basis.	When you use a credit card, the immediate payment is made by the card issuing company. The transaction made is similar to a loan given to the user. The credit card holder has to repay the amount to the credit card issuer at a later date.
Access to funds	A debit card only allows you access to the amount available in your current or savings account. If you have INR 10,000 in your account, you can only make payments up to INR 10,000	Credit card holders can access funds up to the pre-approved credit limit. Usually, a high credit limit is offered to those with a high credit score or if the user has a corporate account with the bank.
Interest	In case of a debit card, the funds are debited on a real-time basis. No interest is payable.	In contrast, delay in the payment of credit card amount attracts penal interest.

Charges	To continue using your debit card, you have to pay an annual maintenance fee, along with a joining fee (depending upon the bank) and processing fee.	While you must also pay the same fees to continue using your credit card, you may also incur late payment fees, prepayment penalty and foreclosure charges (in case of loans taken on credit card).
Fees	In case of a debit card, annual fees and PIN regeneration fees are applicable.	In case of a credit card, a host of fees are payable. These include late payment fee, annual fees, and joining fees.
Credit period	A debit card does not have any credit period. The funds available in the account are deducted instantly when a debit card is swiped.	Credit cards have a credit period. The transaction amount is lent to the user on credit.

Case Study on Credit Card

Mr X has been enjoying a credit card from ABC Bank. The bank has fixed a spending limit of Rs. 200000 lac on his card. During July 2016, he made purchase of Rs. 150000 and paid on due date (10 Aug 2016) Rs. 120000 being a part of the outstanding amount of Rs. 150000. On 11 Aug 2016, he made additional purchase of Rs. 70000. Rate of interest charged by bank is 2 % per month.

Answer the following questions

What would be the minimum payment requirement on credit card dues during any month?

(a)3% of due

(b)5% of due

(d)10% of due

As the bank charges interest at 2% per month, what would be the annual effective rate to the user?

(a) 24.52%

(b) 26.82%

(d) 28.64%

Daily interest charged on outstanding balance as on 11 Aug 2016 will be ……

(a) Rs.60.50

(b) Rs.65.75

(d) Rs.75.25

Total interest Charged on 10 Sep 2016 will be ……

(a) Rs.1865

(b) Rs.1908

(c)Rs.1973

(d) Rs.2036

If Mr A wants to clear all his dues on the due date on 10 Sept 2016, what amount would be required to pay ……

(a) Rs.30000

(b)Rs.70000

(d) Rs.101913

Solution

1-b

Minimum payment require 5%

2-b

Effective interest rate=(1+r)^n-1

= (1+0.02)^12-1

= 1.26824-1

= 0.26824

= 26.82%

3-b

Daily interest charged=Due outstanding*12/365*r

=(30000+70000)*12/365*0.02

=100000*12*.02/365

=24000/365

=65.75

4-c

Total interest charged= no of days outstanding * Daily interest

From 11 Jul 2016 to 10 Aug 2016 = 30 days

=30*65.75

=1973

5-d

outstanding amount+additional purchase+interest

= 30000+70000+1973

= 101973

SSY can be opened for …… (i) Your girl child, (ii) Your boy child, (iii) your adopted girl child

(a) Only (i) and (ii)

(b) Only (i) and (iii)

(d) (i), (ii) and (iii)

Pre-Mature Withdrawal of up to 50% of the amount is allowed after the account holder turns …… for the requirement of ……

(a) 18 year, marriage

(b) 18 year, marriage or higher education

(d) 21 year, marriage or higher education

…… on this account is also exempted from income tax. (i) Interest, (ii) Maturity amount

(a) Only (i)

(b) Only (ii)

(d) Both (i) and (ii)

How many number of deposits permitted in a year? (i) No fixed number of deposits, (ii) The depositor can deposit a multiple of Rs 100 through out the year, (iii) Maximum 12 number of deposits in a year

(a) Only (i) and (ii)

(b) Only (i) and (iii)

(d) (i), (ii) and (iii)