CREDIT CARD

&
CREDIT RATING
AGENCIES

By- Urmimala Mukherjee

B.Com LL.B(H)
5th Sem

CREDIT DEFINITIONS
Credit
Trust given to another person for future
payment of a loan, credit card balance, etc.
Creditor
A person or company to whom a debt is
owed.

 Card Issuing BankThe financial institution that bills the

consumer for repayment and accepts risk for fraudulent
activity.
Interest is a fee charged by the creditor, calculated monthly
or annually.
Interest ExpensesThe profit the banks make by charging
interest. Banks actually receive their money at a lower rates;
therefore; making money. As interest rates climb, the less
they maketherefore, they increase their rates to you

Most credit cards are

issued by local banks
or credit unions, and
are the shape and size
specified
by
the
ISO/IEC
7810
standard as ID-1. This
is defined as 85.60
53.98mm in size

CREDIT
CARDS

1.
2.
3.
4.
5.
6.
7.
8.

Issuing bank logo

EMV chip on "smart cards"
Hologram
Credit card number
Card brand logo
Expiration Date
Card Holder Name
contactless chip

1. Magnetic Stripe
2. Signature Strip
3. Card Security Code

CREDIT CARD
NUMBERING
The card number's prefix, called the Bank Identification Number, is the sequence
of digits at the beginning of the number that determine the bank to which a credit
card number belongs.
This is the first six digits for MasterCard and Visa cards.
The next nine digits are the individual account number.
And the final digit is a validity check code.
In addition to the main credit card number, credit cards also carry issue and
expiration dates (given to the nearest month), as well as extra codes such as issue
numbers and security codes. Not all credit cards have the same sets of extra codes
nor do they use the same number of digits.

HISTORY
The concept of using a card for purchases was described in 1887 by Edward Bellamy
in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in
this novel, although this referred to a card for spending a citizen's dividend rather than
borrowing.
The modern credit card was the successor of a variety of merchant credit schemes. It
was first used in the 1940s, in the United States, specifically to sell fuel to a growing
number of automobile owners. In 1938 several companies started to accept each other's
cards. Western Union had begun issuing charge cards to its frequent customers in 1921.
Some charge cards were printed on paper card stock, but were easily counterfeited.
A growing field of numismatics (study of money), or more specifically exonumia
(study of money-like objects), credit card collectors seek to collect various
embodiments of credit from the now familiar plastic cards to older paper merchant
cards, and even metal tokens that were accepted as merchant credit cards. Early credit
cards were made of celluloid plastic, then metal and fiber, then paper, and are now
mostly polyvinyl chloride (PVC) plastic.

THE FIVE Cs OF
CREDIT
C = Capacity
C = Capital
C = Collateral
C = Conditions
C = Character

ADVANTAGES OF USING
CREDIT
#1: The use of goods and services as you pay for them.
Example: Driving a car as you pay for it

#2: The opportunity to buy costly items that you might not
be able to buy with cash.
Example: Can you imagine paying cash for a brand new car?

#3: A source of cash for emergency or unexpected

expenses.
Example: Medical, automotive, etc.

#4: Convenience.

Example: Dont have to carry large amounts of cash.

BENEFITS TO
CUSTOMERS
The main benefit to each customer is convenience.

Compared to debit cards and cheques, a credit card allows small short-term
loans to be quickly made to a customer who need not calculate a balance
remaining before every transaction, provided the total charges do not exceed the
maximum credit line for the card.

Credit cards also provide more fraud protection than debit cards.
In the UK for example, the bank is jointly liable with the merchant for purchases
of defective products over 100.

BENEFITS TO
MERCHANTS
For merchants, a credit card transaction is often more secure than other forms of
payment, cash, because they discourage theft by the merchant's employees and
reduce the amount of cash on the premises.
For each purchase, the bank charges the merchant a commission (discount fee)
for this service and there may be a certain delay before the agreed payment is
received by the merchant.
The commission is often a percentage of the transaction amount, plus a fixed fee
(interchange rate).
Some small merchants require credit purchases to have a minimum amount to
compensate for the transaction costs.

HOW CREDIT
CARDS WORK
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.
i.When a purchase is made, the credit card user agrees to pay the card issuer.
ii.The cardholder indicates 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).
iii.Also, many merchants now accept verbal authorizations via telephone and
electronic authorization using the Internet, known as a 'Card/Cardholder Not
Present' (CNP) transaction.

HOW CREDIT CARDS

WORK(CONT.)
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.
i.

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.
ii. Data from the card is obtained from a magnetic stripe or chip on the 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.
i.

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.

HOW CREDIT CARDS

WORK (CONT.)
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.
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 issuer charges interest on the amount owed if the balance is not paid in
full (typically at a much higher rate than most other forms of debt).

3.

1.
2.

4.

5.

6.

7.

8.

1. Account Number
2. New Balance
3. Due Date
4. Minimum Payment
5. Transactions
6. Account Summary
7. Finance Charges
8. Percentage Rate

INTEREST CHARGES
Credit card issuers usually waive(not-claim) 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 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.

INTEREST CHARGES
(CONT.)
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.

IMPROVING YOUR CREDIT

SCORE
Pay bills on time.
Get current and stay current.
Dont open a lot of new accounts too rapidly.
Correct mistakes.
Shop for loan rates within a focused period of
time.
Keep balances low on revolving credit.
Pay off debt.
Check your credit report.

GRACE PERIOD
A credit card's grace period is the time the customer has to pay the
balance before interest is assessed on the outstanding balance.
Grace periods vary, but usually range from 20 to 50 days depending on
the type of credit card and the issuing bank.
Usually, if a customer is late paying the balance, finance charges will be
calculated and the grace period does not apply.
Finance charges incurred depend on the grace period and balance; with
most credit cards there is no grace period if there is any outstanding
balance from the previous billing cycle or statement (i.e. interest is
applied on both the previous balance and new transactions).
However, there are some credit cards that will only apply finance charge
on the previous or old balance, excluding new transactions.

PARTIES INVOLVED
Cardholder: The holder of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the
credit card to the cardholder. This bank bills the consumer for repayment and bears
the risk that the card is used fraudulently.
Merchant: The individual or business accepting credit card payments for products or
services sold to the cardholder.
Acquiring bank: The financial institution accepting payment for the products or
services on behalf of the merchant.
Independent sales organization: Resellers (to merchants) of the services of the
acquiring bank.
Merchant account: This could refer to the acquiring bank or the independent sales
organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Visa,
MasterCard, Discover, American Express, etc. that set transaction terms for
merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic
transactions. May be operated by an independent company, and one company may
operate multiple networks.

TRANSACTION
STEPS
1. Authorization: The cardholder pays for the purchase and the merchant submits
the transaction to the acquirer (acquiring bank).
2. The acquirer verifies the credit card number, the transaction type and the amount
with the issuer (Card-issuing bank) and reserves that amount of the cardholder's
credit limit for the merchant.
3. An authorization will generate an approval code, which the merchant stores with
the transaction.
4. Batching: Authorized transactions are stored in "batches", which are sent to the
acquirer.
5. Batches are typically submitted once per day at the end of the business day.
6. If a transaction is not submitted in the batch, the authorization will stay valid for a
period determined by the issuer, after which the held amount will be returned
back to the cardholder's available credit.
7. Clearing and Settlement: The acquirer sends the batch transactions through the
credit card association, which debits the issuers for payment and credits the
acquirer.
8. Essentially, the issuer pays the acquirer for the transaction.

TRANSACTION
STEPS (CONT.)
10. Funding: Once the acquirer has been paid, the acquirer pays the merchant.
11. The merchant receives the amount totaling the funds in the batch minus either the
"discount rate," "mid-qualified rate", or "non-qualified rate" which are tiers of fees
the merchant pays the acquirer for processing the transactions.
12. Charge backs: A chargeback is an event in which money in a merchant account is
held due to a dispute relating to the transaction.
13. Charge backs are typically initiated by the cardholder.
14. In the event of a chargeback, the issuer returns the transaction to the acquirer for
resolution.
15. The acquirer then forwards the chargeback to the merchant, who must either
accept the chargeback or contest it.
16. A merchant is responsible for the chargeback only if he/she has violated the card
acceptance procedures as per the merchant agreement with card acquirers.

REWARDS
Many credit card customers receive rewards, such as frequent flyer points, gift
certificates, or cash back as an incentive to use the card.
Rewards are generally tied to purchasing an item or service on the card, which
may or may not include balance transfers, cash advances, or other special uses.
Depending on the type of card, rewards will generally cost the issuer between
0.25% and 2.0% of the spread.
Networks such as Visa or MasterCard have increased their fees to allow issuers
to fund their rewards system.
Some issuers discourage redemption by forcing the cardholder to call customer
service for rewards.

FEES CHARGED TO
CUSTOMERS
Late payments or overdue payments
Charges that result in exceeding the credit limit on the card (whether
done deliberately or by mistake), called over limit fees
Returned cheque, fees or payment processing fees (eg phone payment
fee)
Cash advances and convenience cheques (often 3% of the amount)
Transactions in a foreign currency (as much as 3% of the amount). A
few financial institutions do not charge a fee for this.
Membership fees (annual or monthly), sometimes a percentage of the
credit limit.
Exchange rate loading fees (these may sometimes not be reported on
the customer's statement, even when they are applied)

TYPES OF CONSUMER CREDIT

Sales Credit: when you buy goods and
services with a credit card or a charge
account.
Example: Charge Accounts or Credit Cards

Cash Credit: when you borrow money.

Example: Loans

TYPES OF CREDIT CARDS

Travel and Entertainment Cards: you must pay entire bill each
month except for travel-related expenses.
No credit limit, minimum monthly payments at 18% APR on travelrelated expenses
Example: American Express

Company or Retail Store Cards: permit you to charge purchases

only with the merchant issuing the card.
Credit limit, minimum monthly payments, APR varies
Example: Macys Card

General Purpose Cards: issued by banks and can be used at many

places around the world.
Credit limit, minimum monthly payments, APR/fees vary
Examples: Visa and MasterCard

TYPES OF
CARDS IN
INDIA

Premium Credit Cards

Cash Back Credit Cards
Gold Credit Cards
Airline Credit Cards
Silver Credit Cards
Business Credit Cards
Balance Transfer Credit Cards
Co-branded Credit Cards
Low Interest Credit Cards
Lifetime Free Credit Cards
Rewards
There are some additional credit cards that are
available in India as well. Rewards credit cards
available in India can be subdivided into six
categories Points, Hotels and Travels, Retail,
Auto and Fuel.

DISADVANTAGES OF
USING CREDIT
#1: The reduction of future income.
Example: Spending future income now and living beyond
your
income
#2: Expense.
Example: Using credit usually costs money.
#3: Temptation.
Example: Easy to spend money you dont/wont have.
#4: The risk of serious consequences if you misuse credit.
Example: Failure to pay debts on time, bankruptcy,
repossession,
damaged credit score

WHAT IS A CREDIT
RATING?

A credit rating is an opinion on the relative degree of risk associated

with timely payment of interest and principal on a debt instrument.
A simple alphanumeric symbol is normally used to convey a credit
rating.
Credit ratings are calculated from financial history and current
assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of
the subject being able to meet payment requirements for interest
and principal repayment.

RATING SYMBOL OR
SCORE
Depend on rating agency. Ex.- (S&P)
AAAExtremely strong capacity to meet financial commitments. Highest Rating.
AAVery strong capacity to meet financial commitments.
AStrong capacity to meet financial commitments, but somewhat susceptible to adverse
economic conditions and changes in circumstances.

BBBAdequate capacity to meet financial commitments, but more subject to adverse economic
conditions.
BBB-Considered lowest investment grade by market participants.
BB+Considered highest speculative grade by market participants.
BBLess vulnerable in the near-term but faces major ongoing uncertainties to adverse business,
financial and economic conditions.
BMore vulnerable to adverse business, financial and economic conditions but currently has the
capacity to meet financial commitments.
CCCCurrently vulnerable and dependent on favorable business, financial and
conditions to meet financial commitments.
CCCurrently highly vulnerable.
CCurrently highly vulnerable obligations and other defined circumstances.
DPayment default on financial commitment

economic

CREDIT RATING AGENCY (CRA)

It is a company that is responsible for assessing the financial
strength of a company or government entity.This includes domestic
and foreign companies.The main area that a credit rating agency
focuses on is the ability of the company or government entity to meet
the interest and principle payments on their debts and bonds.
A credit rating agency is different from a credit reporting agency.
A credit reporting agency is responsible for compiling
financial data that is necessary for loan decisions.
A credit rating agency does all the statistical assessments that
are involved in placing a rating on a company or organizations
credit history..
A credit rating agency is responsible for providing investors
with information about an organizations creditworthiness.

FUNCTIONS OF A CREDIT
RATING AGENCY

Provide easy to understand information: Rating agencies gather

information, then analyze information to interpret and summarize complex
information in a simple and readily understood manner.

Provide basis for investment: An investment rated by a credit rating enjoys

higher confidence from investors. Investors can make an estimate of the risk
and return associated with a particular rated issue while investing money in
them.

Healthy discipline on corporate borrowers: Higher credit rating to any

credit investment makes the financial instrument (bond, mortgage security)
more attractive to investors. Corporations can borrow money more cheaply
if they maintain high credit ratings on their debt.

Formation of public policy: Once the debt securities are rated professionally,
it would be easier to formulate public policy guidelines as to the eligibility
of securities to be included in different kinds of institutional portfolios.

FUNCTIONS OF CREDIT
RATING AGENCIES
They provide training to the employees and executives of the
companies for better management.
They examine the risk involved in a new project, chalk out plans to
fight with the problem successfully and thus ameliorate the
percentage of risk to a great extent.
They offer services to the mutual fund sector through the
application of fund utilization services
The major industries currently graded by the credit rating agencies
include agriculture, health care industry, infrastructure, and
maritime industry.

ADVANTAGES OF CREDIT
RATING
Benefits to Investors
Safety of investments.
Recognition of risk and
returns.
Freedom of investment
decisions.
Wider choice of
investments
Dependable credibility of
issuer
Easy understanding of
investment proposals

Benefits the Company

Easier to raise funding

Reduced cost of borrowing
Reduce cost of public issues
Ratings can build up image
Ratings facilitates growth
Recognition to unknown
companies

Benefits to Intermediaries
For brokers ratings make it easier to persuade clients to select an investment proposal
of investment in highly rated instruments.

DISADVANTAGES OF
CREDIT RATING

Non-disclosure of significant information

Static study
Rating is no certificate of soundness
Rating may be biased
Rating under unfavorable conditions
Difference in rating grades
Improper Disclosure May Happen
Impact of Changing Environment
Problems for New Companies
Downgrading by Rating Agency

CREDIT RATING AGENCIES

IN INDIA
CRISIL (Credit rating information services
of india limited )
ICRA (Investment information and credit
rating agency of india)
CARE (credit analysis and research
limited)
Fitch rating india pvt. Ltd. (earlier
Duff&phelps credit rating india pvt. Ltd.)
ONICRA credit rating agency of india ltd.

SEBI-Regulator
The capital market regulator regulates
rating agencies in most regions. In India,
the capital markets regulator, the
Securities and Exchange Board of India
(SEBI), regulates the rating agencies in the
country. SEBI laid down an extensive set
of regulations for rating agencies in 1999.

CRISIL
The first credit agency setup on January 1, 1988, jointly started by
ICICI and UTI with an equity capital of Rs. 4 crores, as public Ltd
company.
CRISIL is India's leading rating agency, and is the fourth largest in
the world.
With over a 60% share of the Indian Ratings market, CRISIL Ratings
is the agency of choice for issuers and investors.
CRISIL inspires trust and confidence the world over. It redefines
industry standards constantly, and sets new benchmarks year after
year. At the core of CRISIL's credibility, built up assiduously over the
years, are its values: Integrity, Commitment, Innovation,
Independence, and Analytical Rigour.
CRISIL's majority shareholder, Standard and Poor's, is the world's
foremost provider of independent credit ratings, indices, risk
evaluation, investment research and data.

CRISIL (CONT.)
CRISIL Ratings isIndia's largest ratingagency, having rated
more than 24,541 debt instruments, of more than USD 655
billion (Rs.30,71,459 cr.), issued by over 7938
companies.CRISIL hasstrong 60%penetration in the
domestic bond market and a 53% market share inthe bank
loan rating segment. CRISIL Ratings rates virtually every
kind of organization, including industrial companies, banks
,SMEs, non-banking financial institutions, insurance
providers, mutual funds, infrastructure entities, state
governments, and urban local bodies. Italso rates securitized
paper.

CRISIL (Core businesses)

Rating
Global off shoring -irevna
Research
Capital markets
Infrastructure Advisory
Crisil risk solutions

RATING PROCESS

ICRA
ICRA Limited (formerly Investment Information and
Credit Rating Agency of India Limited) was set up in
1991 by leading financial/investment institutions,
commercial banks and financial services companies as
an independent and professional Investment Information
and Credit Rating Agency.
ICRA was set up by IFCI on 16th January 1991.
It is a public limited company with an authorized share
capital of Rs.10 crores, Rs. 5 crores is paid up.
Today, ICRA and its subsidiaries together form the ICRA
Group of Companies (Group ICRA). ICRA is a Public
Limited Company, with its shares listed on the Bombay
Stock Exchange and the National Stock Exchange.

ICRA (CONT.)
ICRAs major shareholders IFCI (26%), and the
balance by UTI, LIC, GIC, PNB, Central Bank of
India, Bank of Baroda, UCO Bank and banks
(SBI) .
Alliance with Moodys Investors Service
(The international Credit Rating Agency
Moodys Investors Service is ICRAs largest
shareholder. The participation of Moodys is
supported by a Technical Services Agreement,
which entails Moodys providing certain highvalue technical services to ICRA. )

RANGE OF SERVICES
Rating Services
Grading Services
Consulting Services

RATING METHODOLOGY

Consists of four areas : Business analysis- covers an analysis of industry

risk,market position in the country,operating efficiencyo f
the company & legal position.
Financial analysis - analysis of accounting quality, earnings
protection, cashflow adequacy &financial flexibility.
Management evaluation - studyof track recordof the
managements capacity to overcome adverse situations,
goals,philosophy & strategies.
Fundamental analysis analysis of liquidity management,
asset quality, profitability & interest & tax sensitivity.

THANK
YOU