Revolving Credit Card

01/08/2012
What is a revolving credit card?

In Israel, there are two kinds of credit cards: deferred debit cards and revolving credit cards.
Deferred debit card—this is the regular kind of credit card commonly found in Israel. Customers use it to make purchases during the month and have to pay back the entire accrued amount on the next monthly payment date. Customers who make a purchase at the beginning of the month actually receive a full month of credit; on average, they are given fifteen days of credit. However, no interest is charged for this credit and such transactions are not customarily referred to as credit transactions.
One can also use a deferred debit card to make installment transactions. Such transactions are in fact credit transactions, with the issuer of the card or the business owner providing the credit. Thus, instead of paying for the entire transaction at once, the customer divides the payment into several installments.

  • In a credit transaction (in which the card issuer provides the credit), interest is charged in the manner stipulated in the agreement under which the card was issued. (The rate is disclosed in the information attached to the monthly bill.
  • In an installment transaction (in which the business provides the credit), interest is not charged but a “deferred payment fee” is added to each installment. (The fee is set at NIS 0.5; it is disclosed on the credit card company’s rate sheet. To see the rate sheets.

Revolving credit card—this is a credit card that establishes, up front and by consent, a credit facility that the card holder may use. The card holder may carry out transactions up to the limits of the facility and may, on the monthly payback date, repay some of the total or all of it. If the customer chooses not to pay back the entire sum, the unpaid balance carries interest and is rolled over (“revolved”) to the next month, at which time the customer again may elect to pay some of the amount or all of it.
Therefore, a revolving credit card gives the customer the option of paying for h/her transactions in full or in part. However, the customer will pay interest on any sum that’s deferred to future months, i.e., for “revolving” the credit. In effect, such a card gives the customer an extra credit facility on top of bank credit.​

What are the advantages and disadvantages of using a revolving credit card?

Advantages

  • The most obvious advantage of using a revolving credit card is the ability to obtain an extra and rather large credit facility in addition to, and separate from, that given by the bank.
  • Another advantage is flexibility. The customer controls the amount of h/her monthly payback and can set its level. Therefore, if customers run into cash-flow difficulties, they can defer payment and “revolve” the credit to the next month and repay it then.

Disadvantages

  • The interest rate on credit via a revolving credit card is not the lowest. Bank loans and bank credit facilities are usually much less expensive.
  • If customers fail to keep close track of their activity with the card each month, they may take more credit than they intended and have to pay interest on it. In extreme cases, this may even lead to default, with everything this implies.​
What’s important to know and what’s worth comparing?

Before you sign up for a revolving credit card, ask yourself the following questions: Is it appropriate for you to hold a revolving credit card? Are you able and willing to manage your financial affairs more frequently, as this kind of card requires? Is the card appropriate for what you intend to use it for?
If you decide that you are interested in this kind of card, don’t forget that revolving credit, like a bank credit facility, has a price. Therefore, it is recommended to do market research and negotiate to improve the terms of credit offered.
In using a revolving credit card, it’s important to check and compare the following matters:
a. What mechanism is used to repay credit that’s taken by means of the card?
 Every card comes with a default payback sum. When a customer acquires a card and at any subsequent stage, s/he can choose the sum that will be paid back each month.
 If the customer does not set any particular monthly payback sum, the company will do this, either as a certain percent of transactions performed (plus accrued interest) or as a minimum lump sum. The amount set by the credit card company is usually rather small, meaning that most of the total won’t be paid back that month and will continue to bear interest.
Example: say that the customer did not set a fixed monthly sum to be charged to h/her account for transactions with the card or did not contact the company before the monthly payback date. If the default payback mechanism is such that the customer is charged 5% of the accrued total or NIS 150—whichever is greater—then if the customer carried out NIS 4000 in transactions, s/he will be charged only NIS 200 and the rest, NIS 3800, will continue to bear interest.
b. How much does it cost to roll over credit?
 If the customer uses revolving credit and postpones payback of the total from one month to the next, s/he customer will have to pay interest on the sum rolled over. The annual interest rate on revolving credit is the main price that the customer has to pay, and different credit card companies charge this interest at different rates.
 If the customer chooses to use a revolving credit card, s/he should find out what kind of interest s/he will be charged and at what rate. Considering the interest rates that are customary in this market, it is recommended to see whether you can take a bank loan or establish a credit facility that’s just as large and charges lower interest.
c. What fees are charged for using the card?
 One main charge comes with the use of a revolving credit card: the monthly card fee. Benefits are given for joining customer clubs and also, usually, during customer sign-up promotions. Some credit card companies offer discounts on fees for specific periods of time such as the first half year. Therefore, it’s worth asking and finding out what the nature of the discount really is and how long it is given.
d. What credit facility can you get?
 The credit facility created by owning a credit card is the maximum amount that the customer can use to make transactions with the card. As a rule, if the customer overshoots this facility, the transaction that s/he wants to make won’t be approved. However, since credit card companies do have the option of increasing the facility, the customer needs to study h/her account records to see how large the facility is and how much of it has been used each month.​

Five pieces of advice on intelligent use of a revolving credit card
  1. Before you choose a revolving credit card, do some market research among the credit card companies and the cards that are already available. An important parameter in such a comparison is the interest rate; it’s recommended to choose the company that offers the lowest rate and not to be tempted into taking cards that charge a high annual rate.
  2. Bear in mind that a high interest rate may have a major effect on what you’ll be paying during the year.
  3. When you sign up for a card, make sure to ask the service representative to explain exactly what the card is about and how to use it. Importantly, representatives of credit card companies are allowed to sell cards in chain stores but must do this at a separate and appropriately marked stall and not at the checkout.
  4. As you sign up, choose the amount that you wish to repay each month. Bear in mind that the smaller this amount is, the more you’ll be deferring and the more accrued interest you’ll have to pay. Remember that you can change the monthly sum at any time.
  5. Look into the benefits that the card gives and find out whether they are limited in time. Some companies offer discounts on fees for specific periods only—for example, in the first half year. Therefore, it’s a good idea to ask and find out what the nature of the discount really is and how long it is given.