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RaagVamdatt.com launches financial planning service in India - �My Financial Plan�

Tue, 23 Jun 2009 00:04:17 -0500

RaagVamdatt.com now offers financial planning service, called �My Financial Plan�, for the people of India.

I am delighted to launch a totally new service at RaagVamdatt.com - �My Financial Plan�. It is a part of the features I hinted at when the website was relaunched 10 days back.

�My Financial Plan� - The motive behind the service

Through RaagVamdatt.com, I have been helping you with your financial situations for a long time now. I have been eager and willing to listen to your issues, and have been providing solutions that work.

�My Financial Plan� is an extension of the same desire to help you lead a financially healthy life.

�My Financial Plan� is an online financial planning service that aims to look after your long term financial health in a strategic way. It would help you plan for important life events in advance, so that you can meet their financial demands comfortably.

�My Financial Plan� provides you a blueprint that you can follow for your investments, so that you can achieve all your financial goals comfortably.

What does �My Financial Plan� include

A financial plan prepared for you through the �My Financial Plan� service would contain:

A roadmap for making Investments in order to achieve your goals
Analysis of your life insurance needs
Analysis of your health insurance needs
Retirement planning for you
Analysis of your asset allocation
Calculation of your net worth
Analysis of your cash flows
Finding out your liquidity profile
Calculation of your emergency / contingency find requirements

It would also contain concrete suggestions for improving on all these aspects.

Factors that would be analyzed

I would prepare your financial plan (containing all the above) after analyzing:

Your income and expenditure
Your saving habits
Your risk profile
Your assets and liabilities
Your asset allocations
Your insurance needs
Your contingency fund requirements
Your financial goals

Do check it out

Please have a look at �My Financial Plan� - An online financial planning service for the people of India.

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Taxation Regimes - EEE EET ETE TEE � What do these mean?

Sat, 20 Jun 2009 10:47:54 -0500

There are different systems for tax exemption / deduction of investments, and for taxation of the income earned from it, like Exempt � Exempt - Exempt (EEE) or Exempt � Exempt -Taxed (EET). What do these terms mean? What impact does it have on you? Read on.

We often hear about different taxation systems in the media. For example, there is a debate currently going on between the Exempt � Exempt - Exempt (EEE) and Exempt � Exempt -Taxed (EET) systems.

What do these three-letter combinations mean? And why are there three letters? Let�s find out.

Stages for tax benefit and taxation

You investment has three stages when looked at from the tax man�s angle.

Investment Stage

This is the first stage. This is the time when you actually make an investment.

Of course, there is no tax levied at the time of investment. However, there is a possibility of giving you some tax benefit / tax break for the investment that you make.

For example, if you invest something in the Public Provident Fund (PPF), you can claim deduction of that amount from your taxable income under section 80C.

(For more on saving income tax through section 80C investments, please read �Saving Income Tax � Understanding Section 80C Deductions�)

Earnings Stage

This is the second stage. This is the time when you earn from your investment. For example, you get interest on the amount invested.

Here, the tax man has to decide whether this earning would be taxed or not.

For example, interest earned on investments made in National Savings Certificate (NSC) is taxed, whereas the interest earned on investments made in Provident Fund (PF) or Voluntary Provident Fund (VPF) is not taxed.

Withdrawal Stage

This is the third and the last stage. This is the time when you withdraw the money along with the accumulated earnings.

Again, the tax man needs to figure out if this would be taxed or not.

For example, the amount that you get at the maturity of your Public Provident Fund (PPF) account is not taxed.

What do the three letters signify?

Probably you would have guessed it by now � the three letters in any taxation regime name tell you what income tax benefit is available at each of the three stages.

�E� means Exempt and �T� means Taxed.

So for an investment avenue, if there is income tax benefit available at the time of investment, the accumulated interest is not taxed, and even the withdrawal is tax-free, we say that an Exempt � Exempt � Exempt (EEE) regime is followed for that instrument.

Similarly, if for an investment avenue, there is income tax benefit available at the time of investment, the accumulated interest is not taxed, and the withdrawal is taxable, we say that an Exempt � Exempt � Taxed (EET) regime is followed for that instrument.

The taxation regimes

So what are the different taxation systems or regimes possible?

Logically, it would be all possible combinations of the two letters �E� and �T� � EEE, EET, ETE, TEE, ETT, TET, TTE and TTT.

However, tax benefits are usually not available in the second and third stage if there is no tax benefit in the first stage. So, we need to consider only the regimes starting with E.

Thus, we have EEE, EET, ETE and ETT.

Also, either your earning would be taxed when you actually earn it OR when you withdraw it, and not at both times (as that would mean that the same income is taxed twice). So, the second and third stages can�t both have the �T� status.

Thus, practically speaking, there are three taxation styles:

Exempt � Exempt � Exempt or EEE
Exempt � Exempt � Taxed or EET
Exempt � Taxed � Exempt or EET

(Note: Of course, there are many investments available for which there are no tax benefits � like regular bank fixed deposits and Kisan Vikas Patra (KVP). So, we can have TET or TTE system as well.

However, since there is no tax benefit available at the first stage, the question of whether the second or third stage should be taxed is not very relevant)

(To know more about fixed deposits that can help you save income tax, please read �Fixed Deposits (FD) for saving income tax through section 80C�)

Some examples

Public Provident Fund (PPF)

Investment: Tax-deductible
Accumulation: Tax-free
Withdrawal: Tax-free

That is, the Exempt - Exempt - Exempt or EEE regime is followed for PPF.

National Savings Certificate (NSC)

Investment: Tax-deductible
Accumulation: Taxable
Withdrawal: Tax-free

That is, the Exempt � Taxed - Exempt or ETE regime is followed for NSC.

Provident Fund (PF) and Voluntary Provident Fund (VPF)

Investment: Tax-deductible
Accumulation: Tax-free
Withdrawal: Tax-free

That is, the Exempt - Exempt - Exempt or EEE regime is followed for PF and VPF.

Some pension plans

Investment: Tax-deductible
Accumulation: Tax-free
Withdrawal: Taxed (The monthly pension is taxable)

That is, the Exempt - Exempt � Taxed or EET regime is followed for them.

Tax Saving Fixed Deposits

Investment: Tax-deductible
Accumulation: Taxable
Withdrawal: Tax-free

That is, the Exempt � Taxed - Exempt or ETE regime is followed for these FDs.

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RaagVamdatt.com � Redesigned, upgraded and relaunched

Sat, 13 Jun 2009 00:46:50 -0500

www.RaagVamdatt.com has been fully redesigned, upgraded and relaunched with improved functionality and a totally new, modern look.

I am really excited to welcome you to the new and improved RaagVamdatt.com!

I am sure the regular readers would notice the visual changes immediately. But the changes go much beyond the look and feel of the website.

The changes are of three types:

Visual
Functional
Under the hood

Visual Changes

More �human� URLs

You love the articles. Now, you would love the URLs as well.

Geeky URLs like �http://www.raagvamdatt.com/Article54.html� are out, and more descriptive, more understandable URLs like �http://www.raagvamdatt.com/Goal-Based-Investing/54/� are in.

More Colours

Yes, blue was good. But too much of anything isn't very good! So, welcome green!

Now, the site looks more fresh and lively with a mix of light blue and light green.

More White Spaces

The new site has lots of white spaces � it is roomier, lighter, cleaner. And less boxy!

Buttons in the header

Now, there are buttons in the header of the site for the functionality that is used the most. So, less clicks for you!

Improved Commenting

ICICI Bank cuts lending rates (FRR and I-BAR)

Thu, 04 Jun 2009 22:28:29 -0500

ICICI Bank has reduced its lending rates by 0.5% with effect from 5 June, 2009.

A reducing interest rate scenario is not all bad news � it brings cheer to loan seekers and people who have already taken loans!

Rate cut by ICICI Bank

ICICI Bank, which is India�s largest private bank, has announced a reduction in its lending rates. The floating rates have been lowered by 0.5%, and this change in interest rates would be effective from 5th June, 2009.

This rate cut follows the lending and deposit rate cuts announced in April 2009, and the deposit rate cut announced in May 2009.

Floating Reference Rate (FRR)

The Floating Reference Rate (FRR) applicable to retail loans has been reduced by 0.5%. The new FRR stands at 12.75% from the earlier 13.25%.

All new as well as existing floating rate loans (including home and auto loans), would benefit from this rate cut.

Benchmark Advance Rate (I-BAR)

ICICI Bank has also reduced the Benchmark Advance Rate (I-BAR) by 0.5%. The new I-BAR is 15.75%, compared to the earlier 16.25%.

Deposit Rates

There has been no reduction in the deposit rates applicable to the fixed deposits.

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Birth of a child � how should your financial planning change?

Sat, 30 May 2009 23:25:53 -0500

Birth of a child � whether it is a boy or a girl � brings a lot of responsibilities on you as a parent. What are the financial changes that you should make to secure your child�s future? Here is a list.

The addition of a son or a daughter to your family is an occasion of tremendous joy. As the father or the mother of the kid, you would be overwhelmed with happiness.

But at the same time, you also know that a child brings on to you enormous additional financial responsibility.

So what are the things that you should do to secure your child�s financial future?

Re-examine your insurance needs

This is the very first thing you need to do.

Of course, you wouldn�t like to think about your death when your child is just born � but in the best interest of the child, you need to plan for the most unpleasant scenario.

The amount of life insurance that you buy depends totally on your dependents. The idea of life insurance is to make sure that your dependents enjoy the same quality of life even if you are not around.

With the addition of a child in your family, you have a person who is totally dependent on you, and would remain dependent on you for at least 15 to 18 years.

This definitely calls for an increase in your life insurance needs.

So, do increase your insurance cover. And increase your life insurance cover adequately � the amount should be such that it can take care of your child in case of your untimely death.

For maximum cover at the lowest price, go for term insurance. Please read �Term policy is the best policy� for more on this.

Do not fall for a �Child Plan� or a �Children�s policy�

Life insurance companies offer various plans that are supposedly tailored for parents of young children. These are often called �child plans� in order to attract parents.

Please do not fall for these plans � they essentially offer the same benefits as any other insurance plan, and usually have higher expenses / premiums.

The same results can be obtained at a lower cost by buying life insurance and investment products separately.

So, instead of the children�s plans, opt for a simple term insurance plan as explained above. For making investments, read on.

Create new goals and start saving towards them

You need to think about the future needs of the child.

Her college and post-graduate education, and her marriage are some of the important things that would need significant financial resources.

Apart from these, you might want to have something special for your child � like sending her abroad for her higher education.

Whatever be your plans, the bottomline is that you would need a lot of money for all this. And it is advisable to plan and save for it well in advance instead of scrambling for funds when the need arises.

The advantage of starting to save early is that you would need to save very small amounts even if you want to end up with a large amount. This is due to the power of compounding � over time, your small investments would grow into a large sum.

Please read �Start saving early and gain from Compounding - Early bird gets the worm� for more on this.

And please don�t save in a haphazard manner � have clear goals in mind so that you can aim to achieve them, and track your progress on the way.

Each major financial expenditure that you expect to incur on your child should be a goal, and you should save independently for each such goal.

Please read �Goal Based Investing� to master this excellent investment methodology.

Start investing in gold

We Indians are very big on gold. We buy gold like no one else in the entire world.

Even if you are not too fond of gold, you would invariably need gold for your child�s marriage � irrespective of whether you have a son or a daughter.

So just like starting to save early for the goals, start buying gold early on. This would help you buy it at a low average cost. (Please read �Cost Averaging� for more on this method)

Please do not buy jewellery � it is the worst form of investing in gold. Buy either gold coins, or better still, buy units of gold exchange traded funds (ETF).

Please check out the following articles for more details:

Or for all the above information (and more) in one place, download the e-book: �Investing in Gold: Everything you should know�

(You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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Understanding the components of your salary and their taxation

Mon, 25 May 2009 22:28:40 -0500

Your salary consists of many components. This article explains what each component means. It also discusses the income tax applicability of each component.

[The article has been inspired by a query from reader Dinesh Kumar]

There are many components in a salary structure that form your salary � some components are monthly, whereas some are yearly.

(Note: This article talks about the most common components of your salary. It doesn�t talk about the Cost To Company or CTC salary. To know more about your CTC salary and its calculation, please come back to read �Cost To Company or CTC salary: Understanding and Calculation�)

Let�s understand some of the more popular components of your salary.

Basic

As the name suggests, this forms the very basis of your salary. This is the core of your salary, and many other components may be calculated based on this amount.

Basic usually depends on your grade within the company�s salary structure.

Many deductions are also dependent on the basic � for example, your contribution (and the matching component by your employer) to provident fund is 12% of your basic.

(To know more about provident fund and voluntary provident fund, please read �Provident Fund (PF) and Voluntary Provident Fund (VPF)�)

Basic is paid out every month, and is a taxable component of your salary.

Dearness Allowance (DA)

The Dearness Allowance is paid out to compensate for increase in the general cost of living due to inflation.

DA is paid out every month. It is a taxable component of your salary.

Incentive / Bonus

Incentives or bonuses are paid out depending on your performance (and, at times, depending on the company�s / division�s performance as well). This is to reward employees for their better performance.

Incentive is usually paid out monthly. A bonus can be paid out monthly or can be paid out once a year.

Incentive and bonus are fully taxable.

Conveyance Allowance

Conveyance allowance is paid out to meet your expenses on commute related transportation.

Conveyance allowance is paid out every month.

Conveyance allowance upto Rs. 800 per month (Rs. 9,600 per year) is tax-free. Any amount over it is taxable.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is paid out to meet full or part of your expenditure on renting a house.

HRA may be expressed as a percentage of your basic.

House Rent Allowance is paid out every month.

HRA can be tax-free, subject to certain conditions. For more on taxation of HRA, please read �Income Tax (IT) treatment of House Rent Allowance (HRA)�.

Medical Allowance (Reimbursements)

Medical allowance is paid out to help you with the amount that you spend on medical treatment and medicines.

Medical allowance can be paid out monthly or yearly.

Medical allowance is a fully taxable component of your salary.

However, if you receive reimbursement of your medical expenses against submission of bills, such medical reimbursement is tax-free upto Rs. 15,000 per year.

Leave Travel Allowance / Concession (LTA / LTC)

LTA is paid to encourage you to take periodic vacations and travel with your family.

Leave Travel Allowance is usually paid out once a year.

LTA / LTC can be tax-free, provided certain conditions are met. For more on taxation of LTA / LTC, please read �Income tax treatment of leave travel allowance / concession (LTA / LTC)�.

Vehicle Allowance

This is an allowance given to you so that you can maintain a vehicle.

It is usually paid out monthly, and is taxable.

Telephone / Mobile Allowance

This is an allowance given to you so that you can maintain a telephone (landline or a cell phone).

It is usually paid out monthly, and is taxable.

Special Allowance

Special Allowance can be given out to pay money that doesn�t fit into any other head!

Such allowances are paid out monthly, and are taxable.

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Defined contribution and defined benefit pension schemes / plans

Thu, 21 May 2009 22:44:12 -0500

There is a lot of discussion going on in the media about �defined contribution� and �defined benefit� pension schemes.

What exactly do these mean? What are their pros and cons? Is one better than the other?

You would have heard the terms �defined contribution� and �defined benefit� regarding pension schemes.

There was a lot of debate when the government made the pension �defined contribution� (instead of the earlier �defined benefit� pension) for the employees joining after 1st January 2004.

In fact, the New Pension System / Scheme (NPS) for non-government employees is also envisaged to be a �defined contribution� scheme.

(Please read �Highlights of the New Pension System / Scheme (NPS) for non-government employees� to know more about the New Pension System / Scheme - NPS)

Let us understand what �defined contribution� and �defined benefit� mean, and see their differences, advantages and disadvantages.

Defined Benefit

In a defined benefit scheme, you know your pension amount before hand. Or, you know the formula based on which the pension amount would be calculated once you retire.

For example, even when you join service as a 22 year old, you would know that when you retire at the age of 58 years, you would get a monthly pension equivalent to your last drawn basic salary per month.

Since the pension amount is known, and is not dependent on any external factor or on any investment made by you, this type of pension scheme is called defined benefit pension scheme or plan.

Of course, for getting this defined benefit, you need to invest some amount periodically � say every month. Either you or your employer (or both) would contribute this amount.

This amount is invested and earns some returns. But irrespective of the kind of returns generated by the investment, you are assured of your pension as per the pre-defined formula.

This means that the risk of generating enough return lies with the employer.

Till some years ago, all government employees had �defined benefit� pensions. Their pension amounts were linked to their grade and last drawn salary.

Advantages of Defined Benefit Pension Plans

The main advantage of a defined benefit scheme is that � as you would have guessed � the benefit or the pension amount is defined, or known beforehand. This gives a lot of peace of mind.

And you get this pension, no matter how the investments fare. So, you do not have to worry about how the investments would perform. And you do not have to monitor the investments periodically and make adjustments (for example, shifting from equity investment to government securities).

Disadvantages of Defined Benefit Pension Plans

As an employee, there is no apparent disadvantage of the defined benefit pension plan.

However, there are disadvantages for the employer. The employer has to ensure that the funds contributed for the pension are invested in such a way that they generate adequate returns to cover future pension of the employee.

And this is often quite difficult � a prime example being the government�s pension scheme for its employees.

In that case, the returns were not enough to cover pension of the employees, and the government either had to provide for the pensions from other sources of revenue, or from the pension contributions of serving employees � the amount that should have been invested for their pension!

Defined Contribution

In this type of a pension plan, the pension amount is not known beforehand. Also, there is no fixed formula based on which your pension would be determined.

Instead, this is what happens: You keep contributing the amount towards your pension throughout your working life. The amount is invested on your behalf, and the pension that you get after retirement depends on the returns generated � the final corpus of your retirement fund determines your post-retirement monthly pension amount.

This means that the risk of generating enough return lies with you, and not your employer.

Since the amount that you contribute towards your pension is fixed but the pension is not, this is called defined contribution pension scheme or plan.

The New Pension System / Scheme (NPS) for non-government employees is going to be a �defined contribution� scheme.

(Please read �Highlights of the New Pension System / Scheme (NPS) for non-government employees� to know more about the New Pension System / Scheme - NPS)

How �Defined Contribution� works

Flexibility in investment

Since your pension depends on the returns made on the investments, you usually get some say in the way in which the amount is invested.

There can be multiple options available � like equity focused (high risk, high possible returns), debt focused (low risk, low possible returns) or anything in-between (medium risk, medium possible returns).

You usually get the ability to distribute your funds among these different options. Also, you have the ability to change this allocation periodically, say once every year or once every 6 months.

Annuity at the time of retirement

At the time of your retirement, your contributions and the returns generated through their investment over the years would have grown into a large amount.

You are allowed to withdraw only a portion of this amount as a lump-sum. This can be say 30% or 40% of the amount (The exact proportion of the amount allowed for withdrawal depends on the pension scheme).

With the remaining amount, you buy an annuity. This annuity would provide you a fixed amount every month, which would act as your monthly pension.

Advantages of Defined Contribution Pension Plans

The main advantage to you as an employee is that the pension is market-linked: the pension amount depends on the amount with which you buy the annuity, and this amount in turn depends on the returns generated over the years.

Through proper allocation of your funds during your working years, you can make excellent returns on the investments, which would mean that you get a great monthly pension.

The advantage for the employer is that it doesn�t have to worry about management of the pension funds and the returns generated by them.

Disadvantages of Defined Contribution Pension Plans

Unfortunately, the fact that that the pension is market-linked can also be a disadvantage if you are not prudent in your allocation of funds between different investment options.

If the returns generated are not enough, you would get a low pension � meaning that you would be forced to have a low standard of living during your retired life.

Therefore, proper allocation of funds between different investment options based on your risk profile is extremely important for defined contribution pension schemes.

(To learn more about risk profile and how to find your risk profile, please come back to read �Understanding your risk profile�)

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Understanding Deep Discount Bonds

Sat, 16 May 2009 22:47:15 -0500

Want to know what a deep discount bond is? Why it is called a �deep discount� bond? Why is it also known as a zero-coupon bond? Read on.

In �What are bonds � Price, Coupon, Yield and more�, we saw what a bond is.

Now, let�s understand a special type of bond � the deep discount bond (which is also called a zero coupon bond).

What is a deep discount bond?

As the name suggests, a deep discount bond is a type of bond � this means that it is a fixed income instrument. Your investment in this bond gives you a fixed return.

Difference from a regular bond

So, how is a deep discount bond different from a regular bond? Here are a few differences:

- It is not issued at face value. In fact, it is issued at a discount to the face value.
- There is no coupon for these bonds. That is, these bonds bear a zero coupon rate, and have no periodic interest payment.

Well, if this is the case, how do you earn from these bonds? How is the interest paid to you? Let�s find out!

How does a deep discount bond work?

A deep discount bond is issued at a steep discount to the face value of the bond.

Thus, if the face value of the bond is Rs. 100, it is issued at a deep discount to it � say, at Rs. 65.

And on the date of maturity, when the bond is redeemed, the bond issuer pays you the face value of the bond.

Yes, you read it right � the bond is issued at a discount to the face value, and is redeemed at its face value.

The reason for zero coupon

You would probably guess why there is no coupon on these bonds � the difference between the issue price and the face value of the bond is the interest that you earn on your investment!

You don�t earn a periodic interest on these bonds in the form of the coupon, therefore these bonds are also known as Zero Coupon Bonds.

Note: This also means that unlike regular bonds, there is no periodic income from these bonds. You get all the interest at the time you redeem the bond. So, it is like the cumulative option in a fixed deposit (FD).

(Please read �Fixed Deposit (FD) � A favourite for generations� for more on fixed deposits)

What is the rate of return?

For normal bonds, the calculation is easy � you earn a return equal to the coupon if you buy the bond at the face value. If you buy the bond from the market, your rate of return is the yield at the time of the purchase.

But there is no coupon for deep discount bonds � how do you calculate the return?

(Confused by all these terms? Please read �What are bonds � Price, Coupon, Yield and more�)

As we saw before, the return is the difference between the issue price at which you buy the bond, and the face value of the bond � which is the price at which the bonds are redeemed.

This is the total return that you get from your investment � the yearly rate of return in percentage (%) can be derived using the formula we learnt for finding the compound annual growth rate (in �What is Compound Annual Growth Rate (CAGR)?�):

A = P * ( ( 1 + r ) ^ n )

Where

A = Final Amount
P = Principal amount
r = Rate of interest, expressed in %
n = Number of years

Let us understand this using some examples.

Example 1

Let�s say you buy a deep discount bond at Rs. 60. Its face value is Rs. 100, and the tenor is 10 years.

So, in our example,

A = Rs. 100
P = Rs. 60
n = 10

�r� is the rate of interest that we want to find. Using the formula, we get:

r = 5.24%

Thus, your rate of return in this case is 5.24% per year.

Example 2

You buy a deep discount bond at Rs. 35. Its face value is Rs. 100, and the tenor is 15 years.

So, in this example,

A = Rs. 100
P = Rs. 35
n = 15

Using the formula, we get the rate of interest:

r = 7.25%

Thus, your rate of return in this case is 7.25% per annum.

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How to use a credit card � the financially prudent way

Mon, 11 May 2009 21:30:09 -0500

Do you know how a credit card should be used? Do you know how you can avail of the credit facility, while incurring no expense?

Do you know that you can borrow money using a credit card without paying any interest? Yes, interest free!

Read on to find out the right method of using a credit card.

You know what a credit card is, and you know how it works.

(Please read �Understanding Credit Cards � The Basics� and �Credit Cards � Beyond the Basics� to know more about credit cards)

Well, you even have a credit card. In fact, you might have multiple credit cards.

So, how do you use your cards?

Do you purchase to your heart�s content, and just pay the minimum � while rolling over the remaining sum to the next statement period?

Do you reach the credit limit of your credit card, and transfer the balance to another card offering a lower rate of interest?

If the answer to these questions is yes, you could be in a debt trap. Beware � these are not the best ways of using a credit card!

Let�s see how a credit card should be used in order to avail of all the benefits, while still not bearing any costs. That is, let�s learn to use credit cards without paying any interest!

Pay the full outstanding balance � not just the minimum amount due

The first and the most important thing to bear in mind is that you should pay the entire amount due, and not just the minimum amount due.

How do you think credit card companies make money? Through annual fees? No!

The card companies make the most money by charging you an interest on the borrowed amount. And the interest is hefty � anywhere from 24% to 42% per year.

Yes, credit card loans are the costliest. So, why take the most expensive loan?

(Yes, the amount you spend using the credit card is a loan. Please read �Understanding Credit Cards � The Basics� to know more)

And the problem is, when you roll over credit like this, you have to pay this interest on all the purchases in the next statement cycle too! Yes, you don�t get any grace period in this case, and you start paying interest on such purchases from the date of purchase itself.

(Please see the example at the bottom of this article to understand this better)

Therefore, please pay the full outstanding amount every statement period.

In fact, if you cannot arrange for funds to pay the entire amount due, it would be much better to take a personal loan and pay the credit card balance in full. After all, a personal loan costs about 15% per year � just a fraction of the cost of a credit card loan!

Another option is to break a fixed deposit (FD) and repay the credit card amount. After all, what is the point in earning 8% to 12% a year on an FD when you are paying 24% to 42% a year for credit card debt?

Do anything to arrange for funds, but the bottom line is � pay the entire outstanding balance in every statement cycle.

Do not transfer the balance

This flows from the first point � when you transfer the balance to another card, you are not paying back anything. You are just shifting your liability from one card to another.

You would still be paying an interest for the balance on the new card. Why do that? Pay the amount in full instead!

Do not withdraw cash

This is also for the same reason as the first point � if you use the credit card to withdraw cash from ATMs, you have to pay the heavy interest on such withdrawals from the same day! You do not get any grace period for cash withdrawals.

Pay on time

If you make the payment after the due date, you would be charged a late payment fee. So, pay your dues before the due date.

In fact, try to make the payment at least two working days before the due date, as payments take upto two days to clear and reach the credit card company.

This is applicable irrespective of whether you are paying the minimum amount due or the full balance.

Opt for cards that are �lifetime free�

Another cost that you incur on credit cards is the �annual fee�.

Most cards waive off the annual fee for the first year in order to attract new customers. But many companies also offer credit cards that have no annual fee ever.

These are popularly known as �lifetime free� credit cards. Opt for these as far as possible so that you don�t have to pay the recurring, yearly fee.

An example of correct usage of a credit card

Let�s say your statement period is from 15th of every month to the 14th of the following month.

You make a purchase of Rs. 1,000 on 16th June, and another purchase of Rs. 3,000 on 2nd July. This statement period ends on 14th July. You would get the statement for this cycle around 18th July, and the due date would be around 5th August.

Let�s say the minimum amount due is Rs. 200, and the total outstanding amount is Rs. 4,000. Your rate of interest is 30% per annum.

Now if you pay the minimum amount due, you would be rolling over Rs. 3,800 to the next statement period.

Thus, you would be paying an interest of 30% per year (or 2.5% per month) on Rs. 3,800. Also, if you make any further purchases (say, on 25th July), you would be paying 30% p.a. interest on this amount right from 25th July!

This is expensive!

Instead, if you pay the total outstanding amount on 3rd August, you would have repaid your total balance. And you would not be charged any interest for the amount you borrowed!

So, for purchases on 16th June and 2nd July, you can make the payment on 3rd August without paying any interest!

And that is not all � you would get the full grace period for purchases made in the next statement cycle.

Thus, for all purchases made between 15th July and 14th August, you would not pay any interest if you make the full payment till 3rd September!

You can keep making full payments, and enjoy interest free credit perpetually!

Conclusion

Pay the entire outstanding amount on your credit card every statement period, and enjoy interest free credit forever!

Happy spending...

To find out how credit cards work and to understand the basic terms associated with it, please read �Understanding Credit Cards � The Basics�.

To learn about some advanced terms regarding credit cards, please read �Credit Cards � Beyond the Basics�.

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Indian banks cut deposit and lending rates � yet again

Sun, 03 May 2009 22:50:09 -0500

After the Reserve Bank of India (RBI) decreased key rates, many banks in India have lowered their deposit and lending rates.

The Reserve Bank of India (RBI) has recently decreased key rates yet again, and many banks in India are following suit.

Here are the details of the interest rate reductions by various banks in India.

State Bank of India (SBI)

SBI has lowered the interest rate it offers on various fixed deposits by 0.25%, effective May 4th, 2009.

This reduction follows the interest rate cut on 13 April 2009, when SBI had reduced the fixed deposit rates by 0.25% - 0.5%.

Following this latest rate cut, the rate of interest for its 1000 day blockbuster FD is 8% (from the earlier 8.25%).

The interest rate for a deposit of 15 to 45 days will be 3.75%, whereas 1 year to less than 2 years deposits will now fetch 7.5% (against 7.75% earlier).

Deposits of 2 years to less than 1000 days tenure will have a rate of 7.75% (from an earlier 8%), whereas deposits for 1001 days to less than 3 years and 3-5 years deposits would earn interest of 7.75% (from an earlier 8%).

5 to 8 years and 8 to 10 years deposits will carry interest rates of 8% (from an earlier 8.25%) and 8.25% (from an earlier 8.5%) respectively.

ICICI Bank

ICICI Bank has reduced its floating reference rate (FRR) by 0.5% to 13.25%.

It has also reduced its benchmark advance rate (I-BAR) (or the benchmark prime lending rate � BPLR) by 0.5% to 16.25%.

ICICI Bank has reduced its rates by 0.25% to 0.50% for retail fixed deposit of different maturities.

It now offers an interest rate of 8.25% on its 390 days, 590 days and 990 days special deposits scheme.

It is offering the rate of 3.25% for 15 to 29 days deposits, and a rate of 3.5% for 30 to 45 days deposits.

The rate of interest for deposits between 2 years and 10 years is 8.25%.

The revised deposit rates are applicable from 24 April, 2009.

Punjab National Bank (PNB)

PNB has slashed its benchmark prime lending rate (BPLR) by 0.5% to 11%. This reduction in BPLR would be applicable to all existing and new loans.

The rate of interest on car loans, education loans, reverse mortgage and personal loans have been reduced by 0.25% to 0.5%.

The floating rate for home loans has been reduced by 0.25%. Depending on the tenure and loan amount, the new rate of interest would be between 8.75% and 10%.

The interest rate on educational loans linked to the BPLR has also been reduced by 0.5%.

PNB has also revised its fixed deposit rates downwards by 0.25% to 1% across all maturities.

The interest rate for a fixed deposit of 3 years to 5 years duration would now be 7.5% (from the earlier 8%).

These new interest rates are effective from 1 May 2009.

Citibank

Citibank has cut its prime lending rate (PLR) by 0.25% to 14.75%.

The rate cut is effective 1 May, 2009.

Bank of Rajasthan

Bank of Rajasthan has cut its benchmark prime lending rate (BPLR) by 0.50% to 15%.

This new rate is effective from 1 May 2009.

Lakshmi Vilas Bank (LVB)

Lakshmi Vilas Bank has reduced its BPLR by 0.25% to 15%.

LVB has also cut the rate of interest on term deposits by 0.25% to 0.5% depending on the tenure of the fixed deposit.

These new rates will be effective from 4 May, 2009.

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