Banking System

A banker or bank is a financial institution that acts as a payment agent for customers,
and borrows and lends money. In some countries such as Germany and Japan banks are
the primary owners of industrial corporations while in other countries such as the United
States banks are prohibited from owning non-financial companies. Citing cheques
deposited to customers' current accounts. Banks also enable customer payments via other
payment methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account, accepting term
deposits and by issuing debt securities such as banknotes and bonds. Banks lend money
by making advances to customers on current account, by making installment loans, and
by investing in marketable debt securities and other forms of lending.

Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that provide
payment services such as remittance companies are not normally considered an adequate
substitute for having a bank account.

Banks borrow most funds borrowed from households and non-financial businesses, and
lend most funds lent to households and non-financial businesses, but non-bank lenders
provide a significant and in many cases adequate substitute for bank loans, and money
market funds, cash management trusts and other non-bank financial institutions in many
cases provide an adequate substitute to banks for lending savings to.

Are banks exploiting the poor?

The banks have been charged with exploiting the poor with usurious interest rates and
threatening the borrowers by forced loan recovery, practices, the combined effect of
which forced the debt-ridden poor to suicide. banks were turning out to be worse than
moneylenders by charging interest rates in excess of 20%.

Till recently, micro-credit had the determined support of the government and donors. As
unbelievable amounts of cash flowed to the rural poor, the eradication of poverty seemed
not too far away. In reality, however, such incredible cash mobilization has meant little in
terms of average savings per member, which stood at a meager Rs 377.

Micro-credit has been designed to keep savings low, such that the credit cycle can move
uninterrupted. The self-help groups are known to charge interest in excess of 24% to
sustain group profitability. This has been possible through a bank linkage that provides
bank loans to these groups at around 11% interest.

At a prime lending rate of around 11%, providing financial services to SHGs is otherwise
unviable for most commercial banks. No wonder, despite its claims, micro-credit
constitutes less than 15% of all commercial bank lending in the country, So by default,
banks have gained a client base of over 200 million rural families. Enjoying political
patronage on the one hand and poor enforcement of regulations on the other, banks has
had the best of both in exploiting the poor.

But proponents of micro-credit hold that banks are indeed serving the poor. Banks further
contend that just because the prime lending rate is currently around 11% why should a
higher rate of interest be considered `exploitative?? The higher rate of interest is justified
keeping in mind the scale of providing services to rural areas.

It is evident that when it comes to economics, banks keep their interests up-front. Poverty
by all means makes good business sense to them. Otherwise how could these MFIs be
charging interest in excess of 20%, knowing well that no business can generate profits at
such rates of interest on the capital? Clearly, the strategy has been to keep the poor and
the vulnerable in the perpetuity of debt-credit-debt cycles.

Since higher interest rates on micro-credit do not provide scope for savings as also for
investing in insurance, the dominant risk-covering factors for the poor, micro-credit traps
the poor into a debt-cycle. NSS (National Sample Survey) data reveals that rural
households account for 63% of the country’s overall aggregate outstanding debt of Rs
177,000 crore. Thanks to the micro-credit revolution, the incidence of indebtedness
amongst rural households is 27%.

The crucial question remains: did the government not know the modus operandi of MFIs?
Isn’t it an open secret that micro-credit loans earn interest in excess of 20%? Hasn’t the
incidence of borrower harassment been on the rise in both rural as well as urban areas?
Having been in the business of creating self-help groups and promoting micro-finance
institutions, the government cannot absolve itself from responsibility for this mess.

It must surprise many that micro-finance was presented as an alternative to liberate the
rural poor from the clutches of traditional moneylenders, not knowing that one day these
micro-finance institutions would put their predecessors to shame in exploiting the poor. It
is time to re-examine micro-finance from the perspective of protecting poor rural
households.

Why fractional reserve banks, by their very nature, are always tempted to expand
credit. And why fractional reserve banks in a free banking system are under
immense pressure to introduce a central bank?

The problem of the tragedy of the common people always appears when property rights
are defined improperly. In the case of fractional reserve banking, bankers can infringe on
property rights because it is not clearly defined who owns the deposit.

When customers make their deposits, the promise is that the deposit is always available
for withdrawal. However, the deposits, by the very definition of fractional reserve
banking, are never completely available to all customers at one time. This is because
banks will take a part of these deposits and loan them out to other customers. In other
words, they issue fiduciary media. By issuing more property titles than property entrusted
to them, the banks violate the traditional property rights of their customers.

Banks that infringe upon and abuse the property rights of their clients can make very
good profits. The temptation to expand credit is almost irresistible. Moreover, they will
try to expand credit and issue fiduciary media as much as they can possibly get away
with.

This credit expansion brings about another typical feature found in the tragedy of the
commons—external costs. In this case, everyone in society is harmed by the price
changes induced by the issue of fiduciary media. These external costs are not taken into
consideration by the banks that try to exploit the profit opportunities, because the
property rights are not properly defined and defended by the legal system.

Exploitation and external costs are similar. Yet there is one important difference between
the two. There is virtually no limit in the exploitation of the "un owned," i.e.,
environmental properties without clearly defined ownership. However, for the fractional
reserve banks, there is an important limit in the issuing of fiduciary media at the cost of
the bank clients. This limit is set by the behavior of the other banks and their clients in a
free banking system. More specifically, the credit expansion is limited since banks, via
the clearing system, can force each other into bankruptcy.

Let us imagine a simple example. There are two banks: bank A and bank B. Bank A
expands credit while bank B does not. Money titles issued by bank A are exchanged
between clients of bank A and clients of bank B. At some point, the clients of bank B or
bank B will demand redemption for the money titles from bank A. Hence, bank A will
lose some of its reserves, for instance, gold. As is every fractional reserve bank, bank A is
inherently bankrupt; it cannot redeem all the money titles it has issued. Therefore, if bank
B and its clients are demanding that bank A redeem the money titles to a degree which it
cannot fulfill, Bank A must declare its bankruptcy.

Therefore, the clearing system and the clients of other banks demanding redemption set
narrow limits to the issuing of fiduciary media. Banks have a certain incentive to restrict
expansion of fiduciary media to a greater extent than their rival banks, with the final aim
to force their competitors into bankruptcy and remain alone in the market. In other words,
these banks naturally want to exploit the great profit opportunities offered by the
improperly defined property rights, but they can only expand credit to the extent that the
risk of bankruptcy is reasonably avoided. Competition forces them to check their credit
expansion.

The question now concerns how the banks can increase the profits from credit expansion
while keeping the risk of bankruptcy low. The solution, obviously, is to form agreements
with each other in order to avoid the negative consequences of an independent and
uncoordinated credit expansion. As a result, the banks set a combined policy of
simultaneous credit expansion. These policies permit them to keep their solvency, to
maintain their reserves in relation to one another, and to make huge profits.
Therefore, not only does the tragedy of the commons predict the exploitation and external
costs of vaguely defined private property, it also explains why there are great forces in a
free-banking system to form agreements, mergers, and cartels. However, even with the
forming of cartels, the threat of bankruptcy still remains. In other words, the incentive to
force competitors into bankruptcy still remains, resulting in the instability of the cartels.

For the fractional reserve banks, there is now a great demand for the introduction of a
central bank. The one difference between the tragedy of the commons applied to the
environment and the tragedy of the commons applied to a free banking system—limits in
exploitation—is now removed by the introduction of the central bank. The banks can now
exploit the improperly defined property without restriction.

With the creation of a central bank, there is still a check on the exploitation of private
property. In an ideal the drive is to exploit ill-defined property as fast as possible, to
forestall the exploitation others can make. However, even with the existence of a central
bank that guarantees their solvency, it is not in the interest of the fractional reserve banks
to issue fiduciary media as quickly as possible. To do so could lead to a runaway
hyperinflation. The exploitation of the commons must therefore be stretched and
implemented carefully.

Credit Card:
A credit card is a system of payment named after the small plastic card issued to users of
the system. A credit card is different from a debit card in that it does not remove money
from the user's account after every transaction.
Many of us know that the reality of the credit card specially white collar people and how
it trap the people. Even then people are not fully aware the credit card that’s why the
easily caught into Jews devils system. Basically credit card is a sort of loan. The people
who are related with the accounting field they know little bit about it, that it is use for
loan. What banks do, they provide loans to the people with many ways and credit card is
one of the way of loaning system.
Banks normally provides credit cards to business men and well earning people. They use
to take guarantee of their organization or their business related field or any who have
credit card.. it provide a specific credit limit according to your earning per month. You
may purchase different thing from different places for instance hotel, medical stores,
petrol, shopping malls and almost every type of buying of consumer goods. People
purchase easily any sort of thing with electronic money and people usually pay this
amount after twelve to fourteen days including non working days to the bank..
After these facilities of credit cards normally people think its attractive for everyone and
they finally caught in it. In the beginning people use the pay the fee to get the credit card
but it is free of cost. Sales people come to your door step and offer you to get the card..
Now every think that we should get it but the story is different, when people use credit
card and purchase anything from any store and they have to pay two percent extra
amount of the total buying. And if the person is delay the date then bank will charge 36 %
on annually bases. And we have to pay that amount within twelve or fourteen days if
people delay it the bank will highly charge, and people normally delay because of
holidays. In this fast moving world if anyone using the facilities of credit cards they
generally caught in it because of the expenses of a common man is limited and when he
use credit card, it gives a facility of loan which is very fruit full for common man. First
two months of a common man is just like a honey moon for him but by the passage of
time he’ll not able to pay that amount which he got from the credit card.
Banks plays with the psychology of people. How? Think common man has very low
salary and when he has to buy something he decided according to his budget. If budget
does not permit him then he postponed many of his shopping for one, two or more
months. But when he has the facility of credit card of worth Rs. 30,000 then will he
postponed his shopping? Never ever, because bank employees force people to buy on
credit card psychologically.
Credit card issuers usually ignore interest charges if the balance is paid in full each
month, but typically will charge full interest on the entire outstanding balance from the
date of each purchase if the total balance is not paid.
Let us have an example of a person who bought some things on credit card which cost
him 10000 rupees. Now after that when the amount was due, that person was unable to
pay that amount immediately at once. So he asked for monthly installments as there is an
option of paying credit card bill. So, he will pay the amount but with interest. How that
interest is applied, it goes like this. The interest of monthly installments will be based on
Rs 10000, even after he pays the first installment, the interest of the next installment will
be calculated from the principle amount which is Rs 10000. Think for a moment if there
is a person who is unable to pay the principle amount readily, will he be able to pay for
the things he is going to buy afterwards?
Another negative aspect of credit card is the credit card fraud. Credit card fraud is a wide-
ranging term for theft and fraud committed using a credit card or any similar payment
mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain
goods without paying, or to obtain unauthorized funds from an account. Credit card fraud
is also an attachment to identity theft but it happens very rare. The mail and the Internet
are major routes for fraud against merchants who sell and ship products, as well Internet
merchants who provide online services. It is difficult for a merchant to verify that the
actual card holder is indeed authorizing the purchase. In most of the online shipping
websites there are no security codes regarding the entry of your credit card number. So it
is easy for the hacker to attack the website and grab the credit card number for wrong
purposes.

Hidden Credit Card Fees

Interchange Fees Cost Consumers Billions Each Year

Every year American consumers pay billions in credit card late fees, over-the limit fees,
annual fees and balance-transfer fees, sometimes without warning, but at least they are
informed. Consumers are not informed about the most costly credit card fee by far — so-
called “interchange” — hidden in the price of every plastic transaction. Interchange fees
exceed the combined total of all these known charges. (See Figure 1).
Interchange fees cost retailers and ultimately consumers $36.3 billion in 2006 — up 18
percent from the previous year and more than double the $16.6 billion paid just five years
ago.1 Interchange fees are set in secret by Visa, MasterCard and the banks that issue their
cards. The card companies “compete” by increasing the fees — today, averaging about 2
percent of each plastic payment — to induce banks to issue their cards. Also driving up
the cost are the campaigns to convince consumers to use so-called “rewards” cards,
which charge interchange rates in the 2-3 percent range. Retailers initially incur the
interchange fees, which banks extract from the price of each plastic transaction. As the
fees increase and card use explodes, the costs must be passed along to consumers in the
form of higher prices for all products. In fact, all consumers pay — even those who do
not use plastic — because they all pay the same prices for products. The average
household paid more than more than $280 in hidden interchange fees in 2005.2
Hi
t hardest are low-income families. Families who pay by cash or check, in fact, Subsidize
rewards programs that only the richest consumers can afford.
Interchange rates far exceed actual transaction costs. In fact, a small portion of the
interchange fee covers the transaction processing cost. A bank industry consult- ing firm
estimated that 13 percent of the interchange fee covers processing costs, while 44 percent pays
for rewards programs; the balance covers marketing, advertising, network servicing, profits and
other expenses (see Figure 2).
 This breakdown explains why
interchange fees are not
declining despite dramatic
decreases in the cost of
computer communications. The
U.S. leads the world in
productivity and efficient use of
technology, yet American
consumers pay the highest
interchange rates among
industrialized nations.
Americans are not receiving the
benefits of economies of scale,
innovation andcompetition,
along with continuing

low inflation and interest rates.

Card companies and banks
ignore these benefits when fixing the fees. Investigations in Australia, the United Kingdom (UK),
European Union (EU) and elsewhere are documenting the disconnect between the fees and actual
transaction costs. Australia responded by capping the credit card rate at 0.50 percent — less than
one-third the average rate in America. The EU is capping Visa rates on cross-border transactions
at an average of 0.70 percent. European Commissioner for Competition Policy Neelie Kroes
called upon Visa and MasterCard to reduce their “outrageous” credit and debit card fees, issuing
an interim report in an ongoing investigation on April 12, 2006. The report stated that interchange
fees are increasing consumer prices by up to 2.5 percent and are “equivalent to a tax on
consumption.”

Background

In 2003, how U.S. consumers pay for goods and services crossed a historic milestone as
electronic payments exceeded check payments for the first time. This milestone signals that
plastic is becoming the predominant currency of commerce. Although cash and checks are not
likely to disappear soon, the former is now relegated to small transactions while check use is
steadily declining. Most card transactions today are one of three types:

Credit — The customer’s card account is queried to verify it exists. The retailer is assessed a fee
based on the percentage of the transaction. About one-quarter of that fee covers the processing
costs of the retailer’s bank. The balance constitutes the so-called interchange fee, which goes to
the bank that issued the card. The customer receives a statement at the end of the month and pays
the full amount or part of the unpaid balance.
Signature/Offline Debit — The customer’s account is queried to verify the purchase can be
covered. The transaction is held offline, and then transferred from the customer’s bank account to
the retailer’s within two business days. The retailer is assessed an interchange fee from $0.35 for
a supermarket transaction to about 2 percent for other merchants.

PIN/Online Debit — Funds are withdrawn instantly from a checking account after the customer
enters a personal identification number or PIN. The retailer is assessed a $0.17-$0.50 fee. Some
banks charge customers a fee as well, from $0.10 to $2.00.5 This fee appears on the customer’s
bank statement as a bank or convenience fee, or the retailer is listed as the payee even though the
retailer neither assessed nor received the fee. As a condition of accepting credit and debit cards,
retailers are not permitted to assess a surcharge to reveal or recover the interchange fees on
transactions. This restriction is part of the card rules that retailers must adhere to. The rules run
more than a thousand pages, governing every detail of electronic transactions. For many years,
retailers were not even allowed to see much less obtain a copy of these mammoth regulations.
The card companies regard them as proprietary secrets. In 2006, under pressure from Congress
and merchants, Visa and MasterCard posted excerpts of the rules on their websites. Visa now
allows retailers to view the full set of rules only if they sign a non-disclosure agreement. At a
February 15, 2006, hearing, the House Energy and Commerce Subcommittee on Trade and
Consumer Protection asked the card companies to turn over their full set of rules. The Senate
Judiciary Committee made the same request at a July 19 hearing. As of June 2007, Visa and
MasterCard have defied these congressional requests.

The Questionable Basis for Interchange Fees

The volume of electronic transactions has increased dramatically in recent years (see Figure 3).
Sin
ce 2001, debit
card use has
surged by more
than 20 percent
a year.
Economies of
scale,
competition,
plummeting
computer costs,
low interest
rates and
inflation,
however, are
not driving
down
interchange
fees. In fact, the
fees on average
doubled over
the past 10
years. Many of
the costs covered do not provide clear benefits to consumers or retailers. The fees help subsidize
the marketing to entice consumers to use more cards, to use them more frequently and to charge
more goods and services. The inducements include reward points and rebates and no annual card
fees. Retailers counter that consumers have a fixed amount of disposable income. Increased
purchases at some outlets are offset by decreases elsewhere. As plastic becomes the predominant
form of payment, net increases reflect inflation. Furthermore, with cards and card offers
proliferating, this hyper marketing is unnecessary.

In 2006, U.S. consumers received 7.9 billion mail solicitations for credit cards alone, after
receiving 6.1 billion in 2005 (see Figure4)
.

Visa explains why people are deluged with card solicitations: 10 mailings are now required to
sign up new customers — up from two mailings when cards were less widely held. One can
reasonably ask if such marketing is needed, especially when people today carry an average of 4.8
credit cards. Whether or not one agrees with this marketing frenzy, retailers and consumers
should not subsidize it with interchange fees. Customers who pay by cash or check — payments
that are not subject to large processing fees — should not help underwrite these card campaigns
as well by paying higher prices needed to cover interchange costs. The fees are said to cover the
risk of fraud. Most of the debit fraud losses result from easily forged signatures on cards that are
not PIN protected. Yet banks and card companies are inducing customers to use the less-secure
signature debit cards, no doubt because these payments generate higher interchange fees. At the
same time, they are increasing PIN-debit fees for retailers and starting to charge consumers even
though these payments cost the least and are password-protected from fraud. Retailers and
consumers benefit most from the lower-cost and more secure PIN-debit cards. They should not
help subsidize less secure and more costly signature debit card payments — which, if current
trends continue, will soon account for twice as many PIN-debit transactions. Another rationale for
the fees is to cover the losses from consumers who cannot make their card payments. Customers
and retailers should not help cover the losses to overextended consumers who succumb to the
aggressive marketing and default on their card payments. The banks or card companies decide
whether to accept a card application. Retailers and consumers should not subsidize issuing a card
to bad credit risks. Most outrageous is a recent marketing campaign targeting consumers who had
just filed for bankruptcy. Interchange fees also cover the so-called interest-free period — up to a
month for credit cards and within two days for signature debit transactions. The interest-free
periods are negligible for signature cards and nonexistent for PIN-debit ones. With credit cards,
financial institutions earn significant interest from consumers who choose to make monthly
payments rather than clear their account balance. Nearly half of all consumers (44 percent) do not
pay off their card balances each month, generating billions of interest income for banks and card
companies. Once again, consumers and retailers should not supplement this ample source of
income with interchange fees. Most telling is the fact U.S. consumers and retailers pay among the
highest credit card interchange fees in the world, averaging close to 2 percent.
Conclusion

The movement toward a plastic marketplace presents opportunities to reduce costs and fraud and
to offer consumers ample convenient payment options. As with the shift from cash- to a largely
check-based economy years ago, preserving the public trust in the new electronic payments
system is paramount. Exploiting change of this magnitude for financial gain undermines that
trust. When this occurs, public institutions must intervene. From Australia to the U.S. to Europe,
the current interchange fee system is not based on easily measurable costs. Proponents of the
system argue that costs are less important than having a fee structure that maximizes card use.
This argument may have applied years ago when card use was in its infancy. Now that plastic has
become the predominant currency of commerce, there is no need to stimulate more use of plastic.
In addition, by driving up the costs of goods and services, the current fee system abuses low-
income consumers who depend on every dollar to survive. And it is ill-suited for a world
economy in which billions of transactions are made monthly as trillions of dollars, yen and euro
change hands.
Loans:

Loan is a type of debt. All material things can be lent; this article, however, focuses
exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution
of financial assets over time, between the lender and the borrower. The borrower initially
receives an amount of money from the lender, which they pay back, usually but not
always in regular installments, to the lender. This service is generally provided at a cost,
referred to as interest on the debt. A borrower may be subject to certain restrictions
known as loan covenants under the terms of the loan. Acting as a provider of loans is one
of the principal tasks for financial institutions. For other institutions, issuing of debt
contracts such as bonds is a typical source of funding. Bank loans and credit are one way
to increase the money supply. Legally, a loan is a contractual promise of a debtor to repay
a sum of money in exchange for the promise of a creditor to give another sum of money.
There are various types of loan, Personal loan, Mortgage loan, Auto finance, Home loan ,
Corporate loan etc. Basically in loan what banks do they are getting benefits from both
sides, customer’s side whom they are giving loan and account holder’s who are
depositing money in their account. They work like third person. Banks just use our
money. For instance a person who deposit his money in bank in saving account and
getting interest on that, banks are giving specific interest according to his deposited
money, And in the case of loan the banks will charge more than on deposited money. The
basic loose is for the costumer who takes the loan from bank. He has to pay tax to the
Government on principle amount and interest to the bank. We should have to see what
basically banks do if anyone deposit money in bank the will keep 10% in reserve and
give 90% for loan and then again he deposit money in bank the bank again do the same
process bank will get again 10% of that amount and will give remaining 80% for loan.
This creates credit creation in market. The money supply would increase and money
value would decrease. In result the rich is becoming richer and poor is becoming poorer.
One of the important functions of commercial bank is the creation of credit. Credit
creation is the multiple expansions of banks demand deposits. It is an open secret now
that banks advance a major portion of their deposits to the borrowers and keep smaller
parts of deposits to the customers on demand. Even then the customers of the banks have
full confidence that the depositor’s lying in the banks is quite safe and can be withdrawn
on demand. The banks exploit this trust of their clients and expand loans by much more
time than the amount of demand deposits possessed by them. This tendency on the part of
the commercial banks to expand their demand deposits as a multiple of their excess cash
reserve is called creation of credit. The single bank cannot create credit. It is the banking
system as a whole which can expand loans by many times of its excess cash reserves.
Further, when a loan is advanced to an individuals or a business concern, it is not given in
cash. The bank opens a deposit account in the name of the borrower and allows him to
draw upon the bank as and when required. The loan advanced becomes the gain of
deposit by some other bank. Loans thus make deposits and deposits make loans. Banks
purpose was to demonstrate that the growth of the money supply was modest, therefore
future inflation expectations would/should subside. Hence, this would leave the Fed free
to slash rates much further.

Loan creates credit creation, it is the most important function of the commercial banks, it
is basically the multiple expansions of bank demand deposits. As a result of this money
supply would increase in the market. Though, it is an open secret that banks give their
major portion to the borrowers, even then the customers of the banks have full confidence
that their money is safe. Every person is capable of taking loan. So rich is becoming
richer whereas, the poor is becoming poorer. This gap is the main impact on the society.
In result, the money value is decreasing day by day.

Credit Card:
A credit card is a system of payment named after the small plastic card issued to users of
the system. A credit card is different from a debit card in that it does not remove money
from the user's account after every transaction.

How it Works

Credit cards are issued after an account has been approved by the credit provider, after
which cardholders can use it to make purchases at merchants accepting that card.

When a purchase is made, the credit card user agrees to pay the card issuer. The
cardholder indicates his/her consent to pay, by signing a receipt with a record of the card
details and indicating the amount to be paid or by entering a Personal identification
number (PIN). Also, many merchants now accept verbal authorizations via telephone and
electronic authorization using the Internet, known as a 'Card/Cardholder Not Present'
(CNP) transaction.

Electronic verification systems allow merchants to verify that the card is valid and the
credit card customer has sufficient credit to cover the purchase in a few seconds, allowing
the verification to happen at time of purchase. The verification is performed using a credit
card payment terminal or Point of Sale (POS) system with a communications link to the
merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip
on the card; the latter system is in the United Kingdom and Ireland commonly known as
Chip and PIN, but is more technically an EMV card.

Other variations of verification systems are used by eCommerce merchants to determine

if the user's account is valid and able to accept the charge. These will typically involve
the cardholder providing additional information, such as the security code printed on the
back of the card, or the address of the cardholder.

Each month, the credit card user is sent a statement indicating the purchases undertaken
with the card, any outstanding fees, and the total amount owed. After receiving the
statement, the cardholder may dispute any charges that he or she thinks are incorrect (see
Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must
pay a defined minimum proportion of the bill by a due date, or may choose to pay a
higher amount up to the entire amount owed. The credit provider charges interest on the
amount owed (typically at a much higher rate than most other forms of debt). Some
financial institutions can arrange for automatic payments to be deducted from the user's
bank accounts, thus avoiding late payment altogether as long as the cardholder has
sufficient funds.
Interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each
month, but typically will charge full interest on the entire outstanding balance from the
date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace
period, there would be no interest charged. If, however, even $1.00 of the total amount
remained unpaid, interest would be charged on the $1,000 from the date of purchase until
the payment is received. The precise manner in which interest is charged is usually
detailed in a cardholder agreement which may be summarized on the back of the monthly
statement. The general calculation formula most financial institutions use to determine
the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved.
Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of
the average daily balance (ADB) divided by 365 and then take this total and multiply by
the total number of days the amount revolved before payment was made on the account.
Financial institutions refer to interest charged back to the original time of the transaction
and up to the time a payment was made, if not in full, as RRFC or residual retail finance
charge. Thus after an amount has revolved and a payment has been made, the user of the
card will still receive interest charges on his statement after paying the next statement in
full (in fact the statement may only have a charge for interest that collected up until the
date the full balance was paid...i.e. when the balance stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may become a
complicated financial instrument with multiple balance segments each at a different
interest rate, possibly with a single umbrella credit limit, or with separate credit limits
applicable to the various balance segments. Usually this compartmentalization is the
result of special incentive offers from the issuing bank, either to encourage balance
transfers from cards of other issuers. In the event that several interest rates apply to
various balance segments, payment allocation is generally at the discretion of the issuing
bank, and payments will therefore usually be allocated towards the lowest rate balances
until paid in full before any money is paid towards higher rate balances. Interest rates can
vary considerably from card to card, and the interest rate on a particular card may jump
dramatically if the card user is late with a payment on that card or any other credit
instrument, or even if the issuing bank decides to raise its revenue.

Impact

Due to creadit cards People are becoming materialistic due to the use of credit cards; they
simply enter the market and buy those things whatever they like even if they don’t have
any cash or payment. The credit card venture charges excessive interest, passing on a
small percentage to depositors.The reality of the credit card specially white collar people
and how it trap the people. Even then people are not fully aware the credit card that’s why
the easily caught into Jews devils system. Basically credit card is a sort of loan. The
people who are related with the accounting field they know little bit about it, that it is use
for loan. What banks do, they provide loans to the people with many ways and credit card
is one of the way of loaning system.

Banks normally provides credit cards to business men and well earning people. They use
to take guarantee of their organization or their business related field or any who have
credit card.. it provide a specific credit limit according to your earning per month. You
may purchase different thing from different places for instance hotel, medical stores,
petrol, shopping malls and almost every type of buying of consumer goods. People
purchase easily any sort of thing with electronic money and people usually pay this
amount after twelve to fourteen days including non working days to the bank..
After these facilities of credit cards normally people think its attractive for everyone and
they finally caught in it. In the beginning people use the pay the fee to get the credit card
but it is free of cost. Sales people come to your door step and offer you to get the card..
Now every think that we should get it but the story is different, when people use credit
card and purchase anything from any store and they have to pay two percent extra
amount of the total buying. And if the person is delay the date then bank will charge 36 %
on annually bases. And we have to pay that amount within twelve or fourteen days if
people delay it the bank will highly charge, and people normally delay because of
holidays. In this fast moving world if anyone using the facilities of credit cards they
generally caught in it because of the expenses of a common man is limited and when he
use credit card, it gives a facility of loan which is very fruit full for common man. First
two months of a common man is just like a honey moon for him but by the passage of
time he’ll not able to pay that amount which he got from the credit card.
Banks plays with the psychology of people. How? Think common man has very low
salary and when he has to buy something he decided according to his budget. If budget
does not permit him then he postponed many of his shopping for one, two or more
months. But when he has the facility of credit card of worth Rs. 30,000 then will he
postponed his shopping? Never ever, because bank employees force people to buy on
credit card psychologically.
Credit card issuers usually ignore interest charges if the balance is paid in full each
month, but typically will charge full interest on the entire outstanding balance from the
date of each purchase if the total balance is not paid.
Let us have an example of a person who bought some things on credit card which cost
him 10000 rupees. Now after that when the amount was due, that person was unable to
pay that amount immediately at once. So he asked for monthly installments as there is an
option of paying credit card bill. So, he will pay the amount but with interest. How that
interest is applied, it goes like this. The interest of monthly installments will be based on
Rs 10000, even after he pays the first installment, the interest of the next installment will
be calculated from the principle amount which is Rs 10000. Think for a moment if there
is a person who is unable to pay the principle amount readily, will he be able to pay for
the things he is going to buy afterwards?
Another negative aspect of credit card is the credit card fraud. Credit card fraud is a wide-
ranging term for theft and fraud committed using a credit card or any similar payment
mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain
goods without paying, or to obtain unauthorized funds from an account. Credit card fraud
is also an attachment to identity theft but it happens very rare. The mail and the Internet
are major routes for fraud against merchants who sell and ship products, as well Internet
merchants who provide online services. It is difficult for a merchant to verify that the
actual card holder is indeed authorizing the purchase. In most of the online shipping
websites there are no security codes regarding the entry of your credit card number. So it
is easy for the hacker to attack the website and grab the credit card number for wrong
purposes.

Auto Financing:

Car financing is having a bad impact over the society regarding pollution. Air pollution as
well as noise pollution both, is increasing day by day due to the overcrowding of cars.
Another bad impact is the traffic jam, which is increasing very rapidly. Traffic jam is all
due to the increase in traffic as every that person who can’t buy the car readily is going
for auto finance. Moreover, people prefer to go on car even where they can go on foot.
With the increase in traffic there is also an increase in accidental ratio.
Car financing means that when we go to a dealership to buy a car and they are arranging
financing, you will be paying back a lender that they use not paying them back. In most
cases, they have several lenders with different programs to assist buyers in all kinds of
different circumstances. In this case, when doing a deal with the bank, there is high
pressure, usually not competitive and loans are often front loaded which means payments
are made up more of an interest in the beginning of the loan than towards the end but
that’s not fair if you are planning for paying the loan off early.
The interest rate you get when financing a new or used car can vary quite a bit from the
advertised rates you see on TV or read in the paper. Probably the biggest influence on
your rate is your credit rating. Your credit history and credit score tell lenders a lot about
your money habits and are designed to give them an idea of what their risk is if they loan
you money. They often raise the interest rate if your loan is seen as high-risk. Another
thing that affects the rate you get is the term of the loan. Typically, the shorter the loan,
the lower the rate. Keep in mind that the shorter the term, the higher your payments will
be.
What basically banks do in car financing is that when you buy a car there is terminology
named as down payment in which you will pay some part of the payment of your car
initially. With which you are given some facilities like 1st year insurance, 1st installment
and bank processing charges. The down payment is applicable on the principle amount of
the car. Whereas, the remaining amount is paid by the bank and simply you become the
owner of the car. The interest rate reaches even upto 100% interest rate. For example, a
person buys a car for 3 lac rupees with time duration of 6 years but at the end of the term
he will be paying 5.5 lac rupees for that car. Not only this if after having car finance, one
is capable of paying the full amount in 1 year instead of 6 years, there is a penalty for
that. If he pays financing amount after one year which is the amount that bank has paid
for the car after down payment, so he’ll be paying with 20% penalty of the financing
amount. This penalty decreases as the time goes on but a person has to be with bank for
the specified amount of time.