The Intermediate Guide to Credit Card

What is a Credit Card?

One sort of credit facility that banks offer their customers is a credit card, which lets them borrow money up to a predetermined credit limit. Customers can transact goods and services with it. The credit card provider establishes the credit limit by taking into account various aspects, including income and credit score.

Key Takeaways

1. Credit cards are metal or plastic cards that are used to make credit-based purchases of goods and services.

2. Interest is charged on purchases made with credit cards.

3. Stores, banks, and other financial institutions may issue credit cards, which frequently come with benefits like cash back, discounts, or reward miles.

4. Options for people with poor or no credit are provided via secured debit cards and credit cards.

Important Credit Card Terms

1) Credit Limit:

The maximum amount a cardholder can borrow on their credit card is indicated by their credit limit. It is decided by the card issuer using the applicant's income, credit score, and payback history. Overusing credit can result in denied purchases or over-limit fees.

It's essential to control your spending under this limit to keep your credit score high and prevent more fees.

2) Interest Rates:

The cost of borrowing money on a credit card is represented by interest rates, which are stated as annual percentage rates (APR). They may change according to the card issuer, the state of the market, and each person's creditworthiness. It's important to understand interest rates since they have an impact on the total amount charged on the credit card balance if it isn't paid in full each month.

Reducing interest costs and preserving financial stability can be achieved by managing credit card balances properly.

3) Fees and Charges:

There are several fees and charges associated with credit cards, including annual, late, cash advance, and foreign transaction costs. These charges may have a big effect on how much using a credit card costs overall. Knowing about these fees and taking them into account when creating a budget and making other financial decisions may help you make more thoughtful and cautious judgments.

This knowledge can assist you in cutting back on wasteful spending and improving the way you handle your money.

Choose from a Range of Credit Cards

Numerous credit cards are available in India to accommodate a range of budgetary requirements and tastes. Among the most well-liked ones are:

1. Conventional Credit Cards:

These are straightforward credit cards with conventional features for daily use and a predetermined credit limit. 

2. Rewards Credit Cards:

Rewards credit cards provide points, rebates, or discounts on particular transactions. They are ideal for people looking for perks. 

3. Travel Credit Cards:

Designed with regular travelers in mind, these cards offer benefits relating to travel, like air miles, participation in frequent flier programs, and access to airport lounges. 

4. Premium Credit Cards:

Designed for affluent customers, premium cards include admission to exclusive events, golf privileges, concierge services, and luxury travel incentives. 

5. Co-Branded Credit Cards:

These cards offer exclusive benefits and discounts in conjunction with particular companies, airlines, or retailers.

Benefits of Credit Cards

a) Simple Credit Availability:

Easy access to credit is a credit card's greatest benefit. With a deferred payment plan, you can make purchases with your credit card now and pay for them later. Every time you swipe, your bank balance is not diminished because the money is not taken out of your account.

b) EMI Establishment:

Using your credit card to postpone payment is an option if you intend to make a sizable purchase and don't want to use all of your savings for it. To ensure you aren't paying a large amount in one go and depleting your bank account, you can alternatively decide to pay for your purchase in equivalent monthly installments. When paying for a big-ticket item like a television or an expensive refrigerator, using EMI is more cost-effective than getting a personal loan.

c) Rewards and Deals:

The majority of credit cards are loaded with benefits and inducements to use the card. These can include cash back or the accumulation of reward points with each card swipe. These points can then be redeemed for air miles or applied to the balance of your outstanding credit card debt. To help you save money, lenders also provide discounts on credit card transactions, such as those made for holidays, significant purchases, or airline tickets.

d) Invest in Protection:

Additional security provided by credit cards comes in the form of insurance against lost, stolen, or damaged purchases made with the card. If you would like to file a claim, the credit card statement can serve as verification of the claim's legitimacy.

Disadvantages of Credit Cards

a) Minimum Amount of Due Trap:

The minimum due amount that appears at the top of a billing statement is the largest drawback of a credit card. Numerous credit card holders are tricked into believing that the minimum payment is what they must pay in full when, in reality, it is the lowest amount the corporation requires you to pay to keep your credit facilities open.

Customers thus assume their bill is modest and spend even more as a result, accruing interest on their outstanding balance that could eventually grow to an untenable amount.

b) Excessive Usage:

When you use revolving credit, it can be easy to charge all of your purchases to the card because your bank balance doesn't change, which can hide your debt from you. This can cause you to spend more than you make, which would start a debt cycle with high interest rates on your subsequent payments.

c) Hidden Expenses:

Credit cards may seem easy and uncomplicated at first, but they come with a lot of unstated fees that can add up over time. There are several taxes and fees associated with credit cards, including processing, joining, late payment, and renewal fees. Failure to make a credit card payment on time may result in penalties, and if you do it again, your credit limit may be lowered. These actions would be detrimental to your credit score and future credit opportunities.

d) High Rate of Interest:

Interest is applied to the amount carried forward if you fail to pay your bills by the billing due date. When purchases are made after the interest-free period, the interest is accumulated over time. The typical credit card interest rate is 3% per month, or 36% annually, which is quite a hefty rate.

Conclusion

Because credit cards are so convenient to use and offer flexible repayment choices, they have become an indispensable part of our lives. When used responsibly, a credit card can provide exceptional discounts, benefits, and offers above other financial products, making it a very advantageous option. But if you use credit cards carelessly or if you end up spending more than you can afford when it comes time to pay the bill, they can turn into a source of spiraling debt.