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 into EMI.

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:

1. Credit cards enable the user to make the cashless transaction.
2. There is generally an interest-free period to repay the amount spent via credit card which usually ranges from 40 to 45 days.
3. 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 users are:

1. There are a total of 78 million credit card holders in India as of July 2022
2. The credit card amount spent through credit card amounts to Rs 1.16 trillion in July 2022 alone.
3. 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 middle-class households.

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 discount price.

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.

It is 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 product sold.

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.

For 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 users

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.

Conclusion
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 their knowledge.

End-Notes:

1. https://rbidocs.rbi.org.in/rdocs/ATM/PDFs/ATMJULY20224C14FCD4FB824FF88D5F00BD92FF64C7.PDF
2. https://www.livemint.com/Money/df90y6z5IOYsfjGPTiW5DN/Urban-indias-ownership-of-credit-card-increases-as-income-r.html