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What is a Credit Card? Things You Need to Know Before You Own One

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What is a Credit Card? Things You Need to Know Before You Own One

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If you are just getting started on your journey to improve your personal finance habits, one of the most basic questions you may have is this — What is a credit card and what are the key things you should know before you own one?

If this sounds like one of the financial doubts you have, this article can help you out. But first, let me give you a bit of background. Of late, the number of credit card users in India has begun to grow at an exponential pace. In the financial year 2020-2021 alone, there were around 62 million active credit cards in the country. 

So, what makes these cards so popular? And should you consider getting one for yourself? Here’s some information about credit cards, how they work, and what you need to keep in mind before you apply for one. 

What is a credit card? 

To put it simply, a credit card is a financial tool that allows you to purchase products and services. 

When you use a credit card for purchasing, you essentially borrow money from the financial institution that issued the card to you. And since you’ve borrowed funds, you’re required to repay it within a specified period of time. If you don’t end up repaying the borrowed amount within the due date, interest at a certain percentage is levied on it. 

With a credit card, you can purchase products and services and pay for them later. This can be highly useful for times when you absolutely need to make a purchase but are short on cash. 

Financial institutions issuing credit cards usually impose a limit, known as the credit limit, on the maximum amount of borrowing that you can make. This limit is decided after taking into factors like your income and your age, and more into account.. You can continue to make purchases on your credit card till you reach the credit limit. Once you’ve exhausted your limit, you can no longer use the card until you repay your dues. 

How does a credit card work?

Now that you’ve understood the meaning of a credit card, let’s take a look at how it works. Here’s an example to help you understand it better. 

Say that you have a credit card with a total credit limit of Rs. 1 lakh and that the first day of every month is the statement generation date. Now, you wish to purchase a smartphone worth Rs. 25,000. However, you don’t have the required funds with you. And so, you use your credit card to purchase the smartphone on August 18, 2022. 

On September 01, 2022, your credit card statement is generated, asking you to make the payment of Rs. 25,000 on or before the due date of September 12, 2022. As long as you repay the due on or before the stated date, you would incur no other charges or interest. However, if you miss the due date, interest at a certain percentage will be charged on your outstanding amount, which is Rs. 25,000, till you make the payment. 

What are the features of a credit card?

The features of credit cards tend to vary depending on the issuer and the type of card that you opt for. Some of the common features that you can find on bank credit cards are as follows. 

  • Ability to withdraw cash

Apart from allowing you to purchase products and services, credit cards also let you withdraw cash from ATMs. However, doing so can attract various charges like cash withdrawal fees and interest. 

  • Loan on credit card

Many credit cards allow you to avail an instant personal loan up to a certain percentage of the card’s available credit limit. 

  • Ability to convert large purchases into EMIs 

If you’ve made a huge purchase using your credit card, you can choose to repay the amount in affordable instalments over a period of time. 

  • Contactless payments 

Credit cards these days are offered with a built-in NFC chip, allowing you to make payments by simply tapping the card on the Point of Sale (POS) terminal. 

What are the benefits of a credit card?

Now that you’ve seen some of the credit card features, let’s move on to its benefits. Here are some of the main advantages that you get to enjoy. 

  • You can make purchases on credit 

The primary benefit of a credit card is that it allows you to make purchases even when you don’t have the required funds. 

  • You don’t have to carry cash 

With a credit card, you don’t have to carry large amounts of cash with you. Also, they're accepted worldwide. 

  • You get rewards, discounts, and cashbacks

Many bank credit cards offer rewards in the form of discounts and cashbacks when you use them to make purchases. 

  • You can track your expenses easily

You get an alert each time you use a credit card to make a purchase. That’s not all. You also receive a monthly statement that contains details of all of the spends that you’ve made using the card. This makes tracking your expenses a whole lot easier.

Things you need to know before you own a credit card

If you’re planning to get a credit card for yourself, then here are some key points that you need to know before you go ahead and purchase one. 

  • The different types of credit cards 

There are various different types of credit cards available in India. Usually, they’re categorised according to the kind of rewards they offer. Here’s a short overview of the kinds of credit cards that you can avail. 

  • Lifestyle credit cards
  • Travel credit cards
  • Shopping credit cards
  • Cashback credit cards 
  • Co-branded credit cards
  • Business credit cards

Depending on the credit card that you opt for, the rewards, discounts, and offers that you get to enjoy will vary. Travel credit cards, for instance, provide occasional discounts and offers on flight tickets and hotel bookings. 

Similarly, cashback credit cards are designed to offer a percentage of your spends as cashback. So, before you go ahead and apply for a credit card, ensure that it fits your needs and requirements. 

  • The various fees and charges associated with a card

Credit cards come with various fees and charges. The finance charges, which is the rate of interest charged on cash withdrawals and unpaid outstanding dues, usually tends to be the most significant and the most important one that you should be aware of. 

In addition to finance charges, there are also other fees associated with credit cards. Annual fees, balance transfer fees, cash advance fees, over-limit fees, late payment fees, and foreign transaction fees are a few of the other charges that are levied. 

It is important to be aware of the different charges applicable on the card that you wish to apply for since it can help you make a more informed decision. 

  • The importance of paying your dues on time 

Paying off outstanding dues on your credit card on or before the due date is extremely crucial. Failing to do so can attract heavy penalties and finance charges, which are almost always exorbitant. For instance, the average rate of interest on a credit card ranges anywhere from 35% per annum to around 50% per annum. 

So, the larger your outstanding dues are and the longer you go without paying your dues, the heavier the interest component is likely to be. Not paying your dues for a long period of time can quickly trap you in an endless cycle of debt. Therefore, to avoid all of this, always make sure that you pay your credit card bills in full on or before the due date.

  • The impact your credit card has on your credit score 

Your credit score is one of the many metrics that financial institutions take a look at when you apply for a loan or a credit facility. The higher your credit score, the more trustworthy you’re deemed to be, which can help you land very attractive loan offers. 

Did you know that the way you use your credit card has a significant impact on your credit score? Yes, that’s right. When you use your bank credit cards for purchases and pay your dues back in full before the due date, your credit score goes up. On the other hand, when you fail to repay your dues in full on or before the said due date, your credit score takes a huge hit. 

  • The terms and conditions of a credit card

Finally, before you choose to apply for a credit card, make sure to thoroughly read through the terms and conditions applicable for the card. Reading the fine print can provide some much needed information about the card. This includes the list of charges applicable for the card, the various rewards offered by it, and how you can avail them. 

Summing up

A credit card is one of the best payment methods that you can use. It allows you to purchase your favourite products and services and pay for them later. Additionally, you also get to enjoy several rewards and discounts for using your card And get to build credit history and increase your credit score. 

That said, aside from the many credit card features and benefits, one thing that you should always keep in mind is that it is crucial to use a credit card responsibly. Refrain from overusing your credit card and remember to pay off all your dues in full before the stipulated due date. This will ensure that you don’t fall into a debt trap, while still allowing you to fully enjoy the benefits of a credit card. 

Frequently Asked Questions (FAQs)

How to use a credit card?

To use a credit card online, all that you need to do is choose the ‘credit card’ option at the payment gateway, enter the details of the card, and proceed to make the payment. 

To use it offline, simply insert the card into the card reader machine and enter your card’s four-digit PIN to make the payment. Alternatively, if your card supports contactless payments, you can simply tap your card on the card reader machine to pay for your product or service. 

️Which type of credit card is the best?

When it comes to credit cards, there are multiple different types, each with its own set of features and benefits. Some credit cards offer reward points for online shopping, while others offer cashbacks on purchases. There are also travel credit cards that offer air miles as rewards, and high-end credit cards that offer complimentary memberships and various premium benefits. You can even opt for business credit cards, which are issued exclusively for business spends.

The type of credit card that best fits your needs and requirements is often the best kind of card that you can get. 

What are finance charges in a credit card?

Finance charges is the rate of interest that’s charged on cash withdrawals and unpaid outstanding dues on a credit card. It is often represented as a percentage per month or percentage per annum. 

What is the simple definition of a credit card?

A credit card can be defined as a financial tool that allows you to purchase products and services on credit. It can come in quite handy during situations where you need to make purchases, but don’t have the required funds with you. 

What is a credit card and what are its uses?

A credit card allows you to pay for products and services even when you don’t possess the required funds. The amount of money that you spend on a credit card has to be repaid on or before the stipulated due date. 

Also, paying for expensive products and services is more convenient with a credit card since you don’t have to carry large amounts of cash with you. Other uses of a credit card include the ability to avail loans against it, convert large purchases into more manageable instalments, and keep a track on your expenses.

What are some examples of a credit card?

The HDFC Regalia credit card, SBI Elite credit card, SimplyCLICK SBI credit card, and Axis Bank Neo credit card are a few examples of credit cards.

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