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How is interest computed on your credit cards dues?

Finance charges or interest charges are the credit card interest rate. It is the rate charged by credit card issuers on the borrowed amount. However, the interest charges are applicable only to those cardholders who don’t pay their outstanding in full.

For instance, if your credit card bill amount for a previous billing cycle is Rs.10,000 and you wish you make a partial payment, either minimum amount due (MAD) or even lesser than that, then the bank will levy finance charges as per its policy.

Hence, even where you make the minimum amount due on your credit card – interest will be charged to you as you have not paid back the full amount.

The good thing about using credit cards is that if you clear the entire outstanding on the card before the due date, you won’t be charged any interest. But if you’re someone who wishes to clear the dues at your own pace, you must know how much interest your bank charges, how it’s calculated and all other related information.

How Are Credit Card Interest Rates Calculated?

Credit card interest rate is calculated as the Annual Percentage Rate (APR) of charge. It is the interest rate for the whole year rather than a monthly rate. However, while calculating the interest rate for monthly dues, the monthly percentage rate (MPR) will be applied to the transactions. The APR and MPR vary from one bank to another and one card to another. While applying for a credit card, it’s important to know how much APR is being charged on a particular card.

What is Interest-Free Period of a credit card?

It is called the grace period, during which the balances on credit card do not attract finance charges provided the credit card holder repays the entire outstanding amount in full with the monthly credit card bill. The grace period varies with every credit card and usually is between 20 to 60 days. It is also called the interest free period.

For example, the Credit Card you hold has an interest-free credit period of 50 days. So, a credit card holder whose billing date falls on 15th of the month can spend on her/his credit card from 15th January to 14th February, and her/his bill will be generated on 15th February. Her/his payment due date will be 3rd March. Therefore a purchase made on 24th January will have a credit period of 40 days, while a purchase made on 10th February will have a credit period of 24 days.

Additional Charges other than the Finance Charges

  1. Late Payment Charges – If the MAD is not paid up to the due date, the late payment charges are levied. Late Payment charges are generally a fixed amount for the range of outstanding amount. It could vary from INR 500 to INR 1000 (depending on the credit card you hold).
  2. Over Limit Charges – If the total outstanding amount in a particular month exceeds the credit limit of the card, over limit charges can be a % of the overdrawn amount or a fixed fee (depending on the credit card you hold.)

When will interest be charged on your credit cards?

As mentioned earlier, if you pay the total amount due (TAD) on your credit card before the due date, the interest charges will not be applied. Let’s see the cases when the interest will be levied on your credit card transactions.

Case 1 – When you don’t pay the outstanding amount by the due date – You have to pay interest for the days the amount is outstanding and no payment has been made by you.

Case 2 – When you take a cash advance (cash withdrawal using a credit card) – If you withdraw cash using your credit card, you are availing the cash advance facility, hence, the withdrawn amount will attract finance charges from the date of withdrawal till the amount is paid back in full. There is no credit period/grace period for cash withdrawal. Interest on such cash withdrawal could be levied at anything between 2%-4% a month.

Case 3 – When you pay less than the Minimum Amount Due (MAD) on your credit card – If you wish to pay an amount that is less than your minimum amount due on your credit card, the entire outstanding amount will attract finance charges along with all the new transactions, till the previous outstanding amount is cleared in full. Additional late payment charges are levied.

Case 4 – When you carry forward any outstanding balance from the previous period to the next cycle – If you haven’t cleared your previous month’s outstanding in full, the bank will carry forward the remaining amount to the next billing cycle. In such cases, based on the repayment amount, either MAD or less than MAD, the interest rate will be charged on the outstanding as well as on all the new transactions, till the previous dues are cleared completely.

  • It is very important to know that interest on credit cards is charged from the date of the purchase till the date of payment and not from the due date of the credit card.
  • Interest is charged on whatever amount is pending after the due date – whether it is as small as INR 50 – hence, you must pay your credit card debt always in full.
  • You will get a credit period of 40-45 days for every purchase but if you do not make full payment, interest will be levied from the date of purchase.
  • Payment made is first adjusted towards interest, penalty and other charges and then it is adjusted towards the principal amount.

We have tabulated below an example of how interest is computed on your credit cards.

Calculation of Interest & other charges on a Credit Card (@wealth Café working)
PeriodTransaction Amount (Rs.) Amount (Rs.)
JanuaryPurchase made on 10 January 2019          5,000
Total amount due on a statement dated 15 January 2019      5,000
Minimum amount due on a statement dated 15 January 2019 (MAD is typically 5% of the TAD)          250
Payment due date – 3 February 2019 (no payment was made)             –
FebruaryPurchase made on 7 February 2019          2,000
Purchase made on 10 February 2019          5,000
On the next statement dated 15 February 2019, interest charges will be levied as follows
Interest on Rs.5000 for 35 days (from 10th January to 15th February)             201
Interest on Rs.1,000 for 9 days (from 7th February to 15th February)               21
Interest on Rs.500 for 6 days (from 10th February to 15th February)               35
Penalty Charges for the default in the month of January (not paying Minimum amount due)             500
Total Amount due on a statement dated 15 February 2019      12,757
Minimum Amount due on a statement dated 15 February 2019           638
Payment due date – 3 March 2019 (partial payment was made)        5,000
*this payment will not be mapped against the purchases of Jan directly but will first be adjusted against interest
MarchPurchases made on 25 February 2019          2,000
Purchases made on 5 March 2019          3,000
On the next statement dated 15 March 2019, interest charges will be as follows
Interest on 7757 for 28 days (from 15 February to 15 March)             250
Interest on Rs. 2000 for 18 days (from 25 February to 15 March)               41
Interest on Rs 1000 for 10 days (from 5 March to 15 March)               35
Total Amount due on a statement dated 15 March 2019      13,082
Minimum Amount due on a statement dated 15 March 2019           654
Payment due date – 3 April 2019 (full payment was made)      13,082

Hence, the best way to deal with a credit card is to always pay your credit card dues on time. If you are stuck in a credit card debt, please understand the annual interest rate that you are paying on your CC.

Credit cards can be very beneficial when there is an immediate liquidity crunch and you have to pay your bills. The reward points are also good with your credit cards. However, the interest and penalty cycle is very vicious. So pay your dues on time, set reminders and make the most of your credit cards.

Wealth Cafe Actionable – Where you are stuck in a credit card debt and are unable to get out of it, take a personal loan which is way cheaper (interest rate is around 11% on your personal loan). Where you know you will repay in a month or 2, you can opt for a balance transfer from the existing credit card to a new credit card. It is important to know that such balance transfer also levies interest rates but they give a grace period of 30 – 60 days. Also, both these options will levy processing charges, hence do your calculations of what is the best way to get out of debt and work on it.

You must first clear your credit card debt. No return on any investment will be able to match the interest expense of a credit card. Hence, it is more important to pay off your debt first.

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How to negotiate like a boss?

As a freelancer or a business owner or someone applying for a job or even buying vegetables, we all have to deal with negotiating the fees/ rates/ salary with strangers. Being raised as a humble middle-class kid, I wasn’t too comfortable asking for money from other people at first. But when you have to pay the bills and own your responsibility to fulfill your dreams, this is the no. 1 trait everyone must learn in order to get success.

After negotiating a salary with 3 employers when I started my private practice 7 years back it wasn’t easy for me to go out and scout for work. After doing some small certification assignments for one year, I was presented with an opportunity with an MNC company for some work across their different plants. At that time I was desperate for work and was ready to get the assignment for peanuts. But I held myself high and discussed synergies I could bring to my client and successfully got the assignment for about INR 700,000. The confidence I got from that assignment helps me today as well, to send out proposals to my client. Here are the steps I personally used to quote the fees and negotiate like a boss:

  1. Research your potential client
  2. Know your worth/ cost
  3. Leave a room for discussion/ negotiation
  4. Be flexible
  5. Know your bottom price

Research your potential client

When you get a request for proposal, ask details from your potential client about their requirement. Know your clients, their backgrounds, the specifications of the job, their budgets, the timelines for deliverables, the quality standards required for the project. I know you may not guess all these variables at first and you get better with practice. Some companies ask quotes from multiple vendors. The final decision to choose among various quotes is not always the lowest fee, they do a trade-off between best quality services with the lowest fees. Your job is to identify the qualities they appreciate is covered in your proposal and they will be willing to pay a higher price for the quality.

 

Know your worth/ cost

Now that you know the specifications from your clients, estimate the time cost/ material costs you will need to incur in order to deliver your product/ service to your potential client. For example, when I give a fee proposal to a client and I know that the assignment is hard pressed for the deadline and the time available to complete the assignment is very limited, I factor the additional hours I will have to spend beyond the usual business hour to finish my deliverable on the due date. I will give exclusivity as quality to my client for the period of the assignment. Many clients would love to pay a higher price if they know you work exclusively for their assignment.

 

Leave a room for negotiation

While communicating your price, if you sound rigid to your client and give a fees quote – take it or leave it, this will not give a good experience to your potential client and they may not even consider you for any future engagements. Hence, always leave some room for negotiation and quote a price a little higher than you would be okay to work with. When your client asks you to lower your fees or give you counter fees, you know you have the room to accommodate their wishes and not press your quality of work. Be very confident when telling your fees to your clients and don’t ever forget to add the points why your services score an edge on quality.

 

Think Long-term

While discussing the fees, always remember your potential clients will be your potential marketers. One assignment can be a gateway of your recurring assignments with the Company or future potential referrals from the Company. Be willing to accommodate if they have any special requests. Think long term client relationships than short term wins.

Know your bottom price

While you know your price and give a higher quote, sometimes a client will come back and ask for more than 50% reduction in your proposed fees. That’s when it is best for you to know your bottom price beyond which it is okay for you to leave the assignment. This will help you to identify the kind of clients you would want to work with.  It is always good to say NO to a client if they don’t value your services and the price. This will help you create a brand for your business and also find the clients who would love your services and the value you provide to them. NEVER BE DESPERATE.

WC Actionable: I would like to give you one BONUS step while negotiating is TO BE CONFIDENT in your communications. If you are confident in yourself, the client will gauge that you can deliver the value that you are promising. Confidence is the differentiator that will get you the price that you wanted to charge and not the price your client wants to pay. Hope the above points help you in adding value to you and your potential clients. Would love to hear about your experiences. 

PS – This is a guest post by CA Sonia Dawar, who is a fe-money-ist and is a practicing chartered accountant with over 8 years of experience. Negotiation and discussing fees is a part of her everyday assignment. She has taken charge of her money for herself, her family and her business. Looking forward to more insightful posts from her.

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What is MSME Registration and how will it help freelancers and small business owners?

Micro Small and Medium Enterprises who obtain registration under the MSMED Act, 2006 can avail benefits under many schemes issued by the government.

Before discussing further on what are these benefits and how to obtain the registration, you must know who is MSME and how are you qualified for the same.

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

The companies are segregated into micro, small and medium enterprises based on their investment in equipment and plant and machinery.

  1. Micro Enterprise:
    1. Investment in Machinery: Not more than INR 25 lakh
    2. Investment in equipment: Not more than INR 10 lakh
  2. Small Enterprise:
    1. Investment in Machinery: Between INR 25 lakh and 5 Crore
    2. Investment in equipment: between INR 10 lakh and 2 Crore
  3. Medium enterprise:
    1. Investment in Machinery: Between INR 5 Crore and 10 Crores
    2. Investment in equipment: Between INR 2 Crore and 5 Crore

 

Being a freelance designer, you should know about everything that protects your interest and enhances your business.

 

Listed below are advantages that you get for your MSME registration.

1.Collateral Free loans from banks:

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGS) was launched by the GOI to make available collateral-free credit to the micro and small enterprise sector. Both the existing and the new enterprises are eligible to be covered under the scheme. The Ministry of Micro, Small and Medium Enterprises, Government of India and Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.

2. A hefty 50% subsidy on  Patent registration

Enterprises that have MSME Registration Certificate can avail 50% subsidy for patent registration by making an application to respective ministry.

3. 1% exemption on the interest rate on overdraft

Enterprises that have MSME Registration can avail the benefit of 1% exemption on the interest rate on OD as mentioned in the scheme (this is bank-dependent).

4. Eligible for Industrial Promotion subsidy

Enterprises that have MSME Registration are eligible for Industrial Promotion Subsidy as may be prescribed by the government in this behalf.

5. Protection against delayed payments

The Ministry of Micro, Small and Medium Enterprises gives protection to MSME Registered Business against delay in payments from Buyers and right of interest on delayed payment through conciliation and arbitration and settlement of dispute be done in minimum time. If any micro or small enterprise that has MSME registration, supplies any goods or services, then the buyer is required to make the payment on or before the date agreed upon between the buyer and the micro or small enterprise. In case there is no payment date on the agreement, then the buyer is required to make payment within fifteen days of acceptance of goods or services.

Further, in any case, a payment due to a micro or small enterprise cannot exceed forty-five days from the day of acceptance or the day of deemed acceptance. In case of failure by the buyer to make the payment on time, the buyer is required to pay compound interest with monthly interest rests to the supplier on that amount from the agreed date of payment or fifteen days of acceptance of goods or service. The penal interest chargeable for delayed payment to an MSME enterprise is three times of the bank rate notified by the Reserve Bank of India.

6. Concession in electricity bills:

Enterprises that have MSME Registration Certificate can avail Concession on electricity bill by making an application to the electricity department along with MSME Registration Certificate.

7. Reimbursement of ISO Certification charges

Enterprises that have MSME Registration Certificate can claim reimbursement of ISO Certification expenses by making an application to the respective authority.

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5 ways to get your invoices paid faster

As a freelancer, small business owner if you are unable to recover your dues from your clients, we have listed ways which will help you recover your payments due.

Apart from getting an MSME (Micro, small and medium enterprises) registration under the MSMED Act, 2006. The below mentioned 5 ways should help you present your brand and business as a well organized professionally run setup which your clients cannot take for granted:

Get a personalized Email account

We checked profiles of many freelancers/small business owners on Instagram and found most of them using their personal Gmail accounts. Sending a word invoice from your personal Gmail accounts doesn’t put across the best face for your brand/business. Purchasing an email account (YOUR NAME@YOUR BUSINESS/BRAND.COM) would cost you around INR 1,500 per year which is a real investment to your business.

Have a Signed agreement

When you are discussing a potential engagement with your client, discuss clearly the scope of your engagement, the fees and the timelines for delivery of your work and the payment terms. Put all these points in a one-pager agreement and let your client sign and give you a copy of this.

If you are currently doing this by setting out your terms on an email, putting this on an agreement and getting your clients to sign the terms makes it more professional and something your client knows he has signed upon. If you are worried about the turnaround time of getting assigned application, use online tools like DocuSign to get your agreements signed instantly.

Complete your Vendor Onboarding

Before you start the work and while signing your agreement, ask your client to finish the vendor onboarding for you. Big companies generally follow a detailed vendor onboarding process and this may take anywhere from a week to a month to get you onboard as their vendor so that they can pay you once you send them your invoice. Get this done right away so that by the time you are done with your deliverables, your invoice can be sent directly for processing.

 

Raise invoices using an invoicing tool

I bet many of you must be sending an invoice in excel or word to your clients. How about sending a professional looking invoice which goes directly from an application as an email to your clients with your branding? Cool, isn’t it? We use and recommend Quickbooks application for raising your invoices. This is a cloud-based accounting application which you can access from your phone, tab and computer system. It comes at an annual cost of INR 5,000 and the Company keeps running some discount offers all the time.

If you are looking for a free application to use, you should consider Genie books. It is free for users with a turnover of up to INR 1.50 crores. When you raise an invoice, always mention the due date in the invoice itself as per your terms of the agreement.

 

Review your invoices and follow up diligently

The above accounting applications (Quickbooks and Genie books) gives you a dashboard look for your business. You can check invoices sent, whether your clients have viewed the invoice you had sent them and invoices past their due date. Isn’t it great! Review the dashboard at least weekly and take necessary TIMELY follow up actions like a boss!

 

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