All of you would have encountered a situation wherein a representative from your bank reaches out to you asking whether you would like to avail their credit card services. You might have also seen your friends flaunt their credit cards, making you wonder, ‘What is a Credit Card ?’ or ‘Why do people use a credit card when they already have a debit card?’ or ‘How to choose the right credit card’. To put all such doubts to rest, we have curated a list of all the necessary things you need to know about a credit card.
What is a Credit Card?
In the physical sense of the word, a credit card is a simple rectangular plastic card that fits neatly into the palm of your hands. This card is issued by financial institutions and comes with a pre-approved limit. This limit is computed based on several factors like your income, credit history, delayed payments, credit score, the bank issuing the card, etc.
Under this limit, the credit card owner can make purchases by swiping the card at POS terminals or for online transactions. Some banks also allow the customer to withdraw money from the ATM through a credit card. When you use a credit card to make a payment, the money is taken from the pre-approved limit and not from the bank account.
Based on the transaction made, the credit card owner repays the money to the lending back post the completion of the billing cycle. The credit cardholder can also choose to make the repayment in the form of EMI’s as per the terms and conditions of the lending bank.
How do Credit Cards Work?
Having answered the most important question of ‘What is a Credit Card?’, the next major step is to understand how the credit card works. From a customer perspective, you swipe your credit card in merchant outlets just like you do with a debit card. The cashier will then ask you to enter the credit card pin to complete the transaction.
For online payments, you will have to enter the credit card number and the name on the card followed by the CVV (the three-digit number on the back of your credit card). An OTP will be sent by the bank to your authorised mobile number, and you need to enter that to complete the transaction. In a nutshell, the usage of a credit card is very similar to that of a debit card, and from a usage perspective, you may not even feel the difference.
However, you must realise that in the case of a credit card, the payment is made on your behalf by the financial institution issuing the card. Although you can make as many transactions within the limit as possible, it is a good idea to use your credit card in a disciplined manner.
All lending banks issue an account statement every month that talks about transaction details such as payments made, interest charges, outstanding amounts, minimum due, and available credit limit. Post the issuance of the statement the transaction has to be completed within 20 days, failing which interest will be levied on the outstanding amount. The interest keeps on compounding until you pay off the entire amount.
Why Use A Credit Card?
Having learned about the consequences of not paying off your credit card bills in time, you may be sceptical about using a credit card. However, you need to realise that the benefits of using a credit card far outweigh any inconvenience that it may bring. Here are a few reasons why opting for a credit card is a smart choice.
One Time Bonus
Having a good credit score ensures that you get a credit card that offers lucrative first-time bonuses for the spending that you make in the first few months. While some lending banks offer bonus reward points, others offer miles. Such offers can get you e-commerce gift cards, merchandise, discounts at restaurants, flights and hotel bookings, etc.
Cash Back Offers
Most credit cards offer the cashback facility wherein a percentage of your purchase is credited back to you in the form of a cashback. While the finer details may vary from bank to bank, the core concept lies in the fact that the cashback is credited to your credit card account in 60 to 90 days post the transaction. The fraction may seem negligible at first sight, but the total cashback amount for all your credit card transactions adds up to a significant quantity.
For credit card users, the chances of fraud are significantly lesser than that of a debit card user. If your debit card is being used by a malicious person, then the money is immediately deducted from your account. Later, without your realization, your checks may bounce, or auto-debit payments may not be made.
Not only will this make your creditors unhappy, but it will also take a toll on your overall finance record. As most banks take some time in investigating fraudulent transactions and reversing your money, the effect on your record may not be rectifiable. On the other hand, if such a fraudulent transaction happens on your credit card, you just need to inform the credit card issuing authority of the activity and until they complete the investigation, you do not have to shell out money from your pocket.
Several credit cards come offer special rental car insurance that works in addition to your basic car insurance) and travel insurance that helps take the financial burden off your shoulders. Further, electronics and other purchases made with a credit card often come with an extended warranty scheme that exceeds the manufacturer’s warranty.
Credit cards have a much better acceptance than debit cards, especially when you are travelling to a different part of the globe or availing a service. Service providers are often unsure of the exact amount you need to pay before you avail of any service.
This is especially true with car rentals or hotel stays where you may incur additional expenses based on the miles travelled or facilities used. With a credit card, they have your credit line to rely on for such genuine expenditure. Opting to pay via cash or debit card will make you pay a deposit amount upfront which will affect your finances during the trip.
By now, you know what a credit card is, how to use it, and the advantages of having such a card. Today, you can use apps like CRED to pay your credit card bills. And as you embark on your journey of leveraging the power of the rectangular piece of plastic in your wallet, here’s wishing you the very best of luck for the same.