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  • Writer's pictureShirish Khaire

Know Your Credit Card with Cobalt Advisors

Updated: Aug 3, 2020

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With the 1950s marking the launch of the first credit card and the 1960s marking the entry of the first debit card, the plastic money reform was set in motion. Debit and credit card brought convenience to the user but over time the status of credit card tripped as it is a loan instrument.

Debit Vs Credit

To briefly explain a debit card will allow you to spend from your bank account and a credit card is a short term interest-free loan which is given to you as per the limit of the card which again is decided by your income.

Finance pundits have always strongly recommended their clients to avoid the use of Credit cards considering its complex nature.

Modern man drives a mortgaged car over a bond-financed highway on credit-card gas. - Earl Wilson

Sources of Income for Credit Card Companies

It would need a separate post to deliver detail business model of credit card companies but let me list the key factors of their income source briefly.

  1. Merchant Discount Rate (MDR): Not known to many, this is the infrastructure cost that needs to be paid to the switch of the bank when the card is swiped it levied on merchants which sometimes they pass on to the customers.

  2. Interest Rate: This is the most common source of income generation. When we buy some products and then convert the payments into EMI and these EMI earn interests for the companies.

  3. Late payment charges: For some reasons, if you are not able to make your payments or forget to make your payments, in that case, you are charged with late interest payment which is very high.

  4. Annual maintenance charge: This not a hidden charge and commonly known as the annual fee.

Other notable charges being Cash advance fee and Foreign currency mark-up fee.

Benefits and Precautions One Needs To Take While Using Credit Card

As consumer credit cards can be very useful if used properly. This part deserves a separate blog post (leave a comment if you want a separate post).

Benefits: A credit card allows you to use to enjoy interest-free loan if paid within the permissible duration. It also serves as a shield against bank account frauds as the credit card is not linked with the bank account. It can boost your credit score and help you get personal, car, home or education loans in future. The most important purpose it can serve is in time of emergencies.

Precautions: Its better to be safe than sorry. Mind you that the credit card are do allow you interest-free loan but if you extend their given duration the interest rates they charge are very high. It is safe to make use of auto-debit service which allows you to transfer the amount due from your bank account towards your card payment and last but not the least never fall prey to the minimum amount due and make full payment.

Debt Consolidation with Cobalt Advisors

According to Investopedia, "Debt consolidation is the act of taking out a new loan to pay off other liabilities and consumer debts." If you are caught up in inescapable debit card debt you can consider taking a personal loan which will then charge you an average interest of 9.1% instead of the average interest of 19.02% ( the mentioned rates are average rates in USA)on debit card loan.

Advisors are always in favour of reducing the interest burden of their clients.

Final Thoughts

Credit cards can be a life saviour or will trap you in the loop of endless monthly due towards the loan. But it is advisable only to use that amount that you know you can pay off or already have in your bank account so you are sure that the payment can be made in time.

Disclaimer: Before making any financial decisions please consult your financial advisor.


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