Forget that mundane credit card. Or that expensive charge card. A whole new world of smart cards, with personalised services stored in chip, awaits you. BT answers the hard FAQs about cash.

By Larissa Fernand

Dear Money Minder,

Could you tell me something about the Debit Card launched by Citibank that everyone is talking about? I already have a credit card and, when my bill comes, I ask Citibank to debit the sum from my account. Isn't that a debit card too?

Interested Card-Holder

Dear Interested Card-holder, the difference does not lie in how you settle your bills--through cheque, cash, or your bank account--but in when you settle them. With a credit card, you spend now, but pay later. On a debit card, the payment is made on the spot, immediately after the purchase. The shop that accepts debit cards will have an Electronic Data Capture (EDC) terminal, which will immediately debit the sum from your account. So, it works like a cheque-book--only much faster. The one advantage that a debit card has is that it combines the convenience of a credit card with the facility of not having to pay for credit. That's because the customer's account is automatically, and immediately, billed as part of each transaction.

Dear Money Minder,

I have a Citibank credit card. Can I swap them? will I have to reveal my account number during a transaction?

Confused Card-Holder

Dear confused Card-holder, I would have been able to provide the answer had you mentioned whether you bank with Citibank or not. Since debit cards allow for the direct withdrawal of funds from a customer's bank account, you can opt for one only if you have an account with Citibank--which incidentally, insists that you keep at least Rs 3 lakh in the account.

Due to a direct linkage with the user's bank account, there is no pre-fixed credit line; it is limited only by the funds in your bank account. On making a purchase, the card is swiped through a magnetic reader. The shop-owner is supposed to enter the value of the purchase, and the card-holder, a Personal Identification Number (PIN). Always double-check the amount punched in, and don't reveal your pin to the merchant. All transactions must appear on the next bank statement.

Dear Money Minder,

Does this imply that a debit card is better than a credit card? After all, purchases are made and payments too. So, there is no problem of credit at all.

Impressed Card-Holder

Dear Impressed Card-holder, not necessarily. A debit card offers you more security since the card cannot be used without the knowledge of the pin. As far as credit cards are concerned, anyone can fake your signature if he, or she, gets hold of your card. However, the debit card does away with the fundamental benefit that a credit card offers: credit.

Credit is an important financial management tool that enables you to make purchases with instant loans at no interest for around a month. Credit cards are your ticket to financial flexibility. If you are strapped for cash and can't make your payment, you can roll it over to the next month--or even later. The interest that is levied on the amount rolled over will be in the range of 2.50 per cent per month. And then, if it is hard cash that you need, you even have the benefit of a cash advance at a rate of interest of between 2.5 and 3 per cent.

Dear Money Minder,

You make it sound so convenient. But a credit card actually makes you opt for purchases that you can't afford, knowing that you have the flexibility to pay later. And you end up dishing out much more: a rate of interest of 2.50 per cent per month amounts to 30 per cent per annum!

Calculating Card-Holder

Dear Calculating Card-holder, I think I made it quite clear that credit is not income, but something that must be repaid. Credit cards should enhance your personal financial management--not put a burden on it. And this can be done if you limit the amount outstanding to an affordable percentage of your monthly net income. If you pay in full, there is no interest levied--the only exception being in the case of a cash withdrawal. If you don't pay in full, you will pay interest on the amount you are carrying over to the next month. The quicker you pay off the balance, the less interest you pay. If you plan to revolve frequently, opt for a card charging a low interest rate. Be warned: credit can give you a lot of freedom, but a lot of problems too.

Dear Money Minder,

You're saying that the debit card is directly linked to the funds in my bank account, with no fixed credit limit. There is also no facility to roll over credit. Is this not a charge card then?

Fazed Card-Holder

Dear Fazed Card-holder, a charge card is like a debit card in the sense that there is no facility for a credit roll-over. Outstandings have to be settled at the beginning of the next billing-cycle. But it is also like a credit card since the payment is not deducted immediately from the bank account as in the case of a debit card. A charge card is just a credit card which demands settlement before your next billing-cycle starts--which means that you get free credit for, approximately, 45 days depending on which charge card you have.

Dear Money Minder,

I have heard that the Nanz supermarket in Delhi offers the facility of a chip card. What exactly is a chip card?

Interested Card-Holder

Dear Interested Card-holder, a chip card contains an integrated circuit, or a microchip, that holds, and processes, monetary value in the form of electronic data. Each time the card is used to make a payment, the exact amount is deducted from the chip, and the consumer can see what value remains on the card. It works just like a debit card, and could aptly be termed as a pre-paid off-line debit card.

A chip card can either be re-loadable or disposable. The Escorts Cash Card is sold for Rs 250, and the Money Card, launched by the Hyderabad-based Model Financial Corporation is available in Rs 500-denominations, and goes upto Rs 20,000. The Escorts Cash Card offers you some bonuses. If you buy a card for between Rs 5,000 and Rs 9,999, you get Rs 50 added on to the card. If it is between Rs 10,000 and Rs 14,995, the bonus goes up to Rs 150, and to Rs 300 for Rs 15,000 and above. At the moment, the Escorts Cash Card is accepted at Nanz in Delhi while the Money Card is already accepted at grocery stores in Hyderabad, with more petrol pumps, restaurants et al being targetted.

Dear Money Minder,

What is the rationale for going in for such a card when its acceptance is so low?

Finicky Card-Holder

Dear Finicky Card-holder, there are two advantages. First, you can use it for small purchases so that you don't have to bother about loose change. A chip card is a convenient alternative to cash. Also, the facility of reloading value onto your card is as easy as refuelling your car.

Dear Money Minder,

Is that all there is to a chip card? I've heard that the chip card is the next generation in payment technology. The cards you have spoken about are stored-value cards. I also hear about smart cards. What are they?

Informed Card-Holder

Dear Informed Card-holder, a chip card and a smart card are one and the same. The microchip can store much more data than conventional magnetic cards, making them "smarter" by allowing them to perform more functions. France's banks have been pioneers in this segment since the early 1990s, when bank cards were converted to chip cards. Typically, a chip card contains credit, debit, stored value, and loyalty functions. Right now, the chip stores only monetary data. Depending on the chip used--which could range from simple memory devices to sophisticated microprocessors--people will be able to store information that need not be financial in nature. It could be used to gain access to a library or a health club--or pay cellphone bills.

One card will have multiple applications, the pre-paid component being just one of them. And this is what will set it apart from other stored-value programmes. At present, there are over 1.30 billion smart cards in circulation worldwide; by 2000, this figure is slated to go up to 3 billion cards. So, be smart about smart cards.