A credit card is a financial instrument issued by the bank to the customer to
make cashless transactions or withdraw money up to a certain credit limit
pre-determined by the bank with the ability to repay the amount without any
interest usually within a period of 40 to 45 days or to convert the amount spent
Credit cards are the financial savior of hard times when at a certain
point in time the customer is in urgent need of finances or the customer is
unable to pay the whole product price at the time of purchase. Generally, credit
cards are issued by a bank to those persons who have job stability and have a
relationship with the bank for a certain time period, and the bank after
analyzing their behavior to manage their finances finds that the customer has a
sound financial history of managing the finances.
Before issuing a credit card
in every case, credit history is pulled from prominent credit bureau agencies
such as CIBIL, Experian, Equifax, or CIRF which enables the bank to make a final
decision before deciding whether to issue a credit card to a customer or not.
Features of a credit card and general types of credit cards
A credit card is a financial instrument that provides the user with the ability
to make transactions digitally. Credit cards can be of various types depending
on the customer's behavior to use them and lucrative offers are being provided
by the banks depending on the customer's needs and requirements.
For example, if
a customer has to travel a lot credit card that provides the best rewards and
offers on booking of flight or train tickets, complimentary lounge services at
the airport, and offers on hotel booking will be most suitable for him and if a
customer tends to do a lot of shopping credit card having offers on e-commerce
platforms are most suitable for them.
The purpose for which credit cards can be
used may vary from customer to customer but for understanding the effect of the
use of credit cards on increasing inflation credit cards will be divided into
two major categories one is premium-level credit cards and other is entry-level
credit cards and usually premium credit cards have a high reward system and cashback offers ranging from 5 percent to 7 percent while the rewards and
cashback offered on entry-level credit cards are usually very low.
Speaking of the features of a credit card following are the most important
features of a credit card:
- Credit cards enable the user to make the cashless transaction.
- There is generally an interest-free period to repay the amount spent via
credit card which usually ranges from 40 to 45 days.
- users of credit cards have permission to convert transactions above a
certain limit to be converted into EMI typically any transaction above Rs 3000 can be
converted into EMI from 3 months to 36 months and the bank will charge interest
ranging from 9 percent to 15 percent on the amount converted into EMI.
Credit cards and statistics:As per the data issued by RBI[i], some of the key statistics about credit card
- There are a total of 78 million credit card holders in India as of July
- The credit card amount spent through credit card amounts to Rs 1.16 trillion
in July 2022 alone.
- Depending on the income band 62 percent of credit card holders are those
persons who have annual income above Rs 20 lakh and only 5 percent are those
persons who have income up to Rs 5 lakh.[ii]
As per the statistics, only 6 percent of the total Indian population uses a
credit card, and out of these 6 percent majority of the credit card user are
from the high-income level groups and very less credit card users are from
Mechanism of credit cards
Before studying the impact of the credit card on increasing inflation it is
necessary to understand the mechanism of cashback and reward system of credit
cards. Generally, retailers or e-commerce platform provides cashback or discount
offers on the purchase of products via the use of credit cards. It is a common
misbelief that it is the bank that bears the discounts on the purchases made
through credit cards but in reality, it is the retailer that has to bear this
Let us take an example to understand the mechanism in a much better way suppose
person X purchases a laptop with a price tag of Rs 1 lakh and payment is made
through a credit card and the cashback offer on the credit card is 6 percent
which amounts to Rs 6000. Now for making payments through a credit card the bank
provides Rs 6000 either as a discount or as a cashback offer to the user.
generally presumed that the bank bear this Rs 6000 but in reality, it is not the
bank that bears it rather it is the retailer who has to bear the loss and in the
settlement of payment the retailer will only receive the sale amount from the
bank after bank deducted the cashback reward. It presents before us a question
of why the retailer is ready to bear this reward amount when if the payment is
made through bank transfer, UPI, or debit card he would have received the whole
amount of Rs 1 lakh.
The reason behind the same is that the customer is provided
with an interest-free period of up to 40 to 45 days to return the amount spent
through a credit card and the customer even after having sufficient finances in
the bank account can use a credit card to avail cashback offer to get discount
and then later pay a discounted price to the bank and get the same product at a
lower price which he would not have received if he would have paid via bank
transfer, UPI or debit card.
Now looking at the customer behavior that they
would like to pay via credit card to avail benefit to keep their sale volume the
retailers are under compulsion to allow payment via credit card because in the
absence of same the customer will purchase the product from such retailers who
allows payment via credit card and in this process, the retailers has to bear
the discount price and this discount price is paid out of profit margin on the
Credit cards and inflation
As it is the mechanism of credit card offers and discounts that drives the
customer to use them for making transactions. But there is an inherent problem
in the same that results in inflation which is the reduced profit margin of
retailers with the increasing use of credit cards.
Every retailer is offering
products and services to the consumer to earn some profit which is typically the
profit margin in the price at which the retailer purchases the product in bulk
from the distributor and then offers it in small quantities to the customer.
example, when the retailer is purchasing the product in bulk from a distributor
he will get a bulk purchase discount price to suppose in bulk the retailer is
getting the product at Rs 10000 per unit, and at the time of sale to the
customer, the retailer will sale the product unit for Rs 11000 and this
difference of Rs 1000 is the profit margin of the retailer and if any purchase
is made via credit card having a discount offer of Rs 400 the retailer have to
bear this discount from his profit margins and it will reduce the profit margin
from Rs 1000 to Rs 600 on such purchase.
The discount percentage on the purchase of the product is provided on the basis
of the profit margins of retailers as no retailer will not be able to survive if
nothing is left in his hand as profit so if the discount price is up to 6
percent then the profit margin will be 8 percent or more than that. Now with the
increasing use of credit cards the retailer will not be earning as much in
profit margin so they require the distributor of the product to increase their
profit margin and the distributor will ask the company to increase their profit
margin and the ultimate effect will be the rise in the price of the product
which in turn is inflation in itself.
Impact of credit card use on non-credit card holders and entry-level credit card
The users of premium credit user get a discount on the purchase and the more
they purchase the more they will receive a discount but on the use of debit
cards or UPI for making payments, there is no reward or cashback even for the
user for an entry-level credit card there is very low discount rather at the
place of discount they will have a reward point system and much higher purchases
are to be made to collect sufficient reward point to get a benefit.
So if the
price of the product increases the premium card user will have more discount on
the increased price and the premium card usually comes with a high yearly fee
with a condition of waiver if a certain amount is spent throughout the year and
middle household users do not have sufficient income level or consumption level
so that they can either qualify for the same and due to this the persons having
high-income band are the ultimate beneficiary of the credit card use and the
burden of their benefit is shifted on the shoulders of non-credit card users and
entry-level credit card users.
At last, it is to conclude that the system of credit cards and the benefit
attached to the use of credit cards depends on the volume of the amount spent
through credit the higher the amount is spent the higher will be cashback and
rewards but on the other hand, the customer making payment other than credit
card do not receive any benefit and the benefits received by credit card users
is ultimately shifted on the shoulder of non-credit card user without being in