What is a credit card?

What is a credit card?

04 Dec 2019
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The concept of buying on credit enables people to purchase or acquire a product or service immediately, with the promise of making the payment sometime in the future. This mechanism of the immediate transfer of ownership but deferred payment corresponding to it has been around since as far back as the mid-1400s. In the modern-day, the same principle has become more systematic in mechanism and well-documented in record.

Credit Card: Buy Now, Pay later

Credit cards are instruments that make this ‘buy now, pay later’ mechanism possible. Essentially, a credit card is just a plastic card - a chip card, often rectangular in shape, issued by financial institutions (banks and non-banking financial institutions both), that allows you to swipe the card to borrow funds for your purchases up to a pre-approved limit.

The operation of a credit card is based on the principle of revolving credit, which refers to the mode of allowing the credit cardholders to carry the monthly balance of their limit forward for a nominal charge.

Credit Score and Credit History: Terms you should know

The limit up to which you are allowed to transact is decided by the institution that issues your card. This is assessed on the basis of your credit score and credit history. The credit score is basically a numerical depiction of a person’s ability to honour their debts. In simple terms, it measures how easily you can repay the borrowed amount. From that, it follows that a higher credit score begets a higher limit. Similarly, your history of credit payments also determines this limit. A rich credit history comes with its benefits. If you have been consistent and timely in your repayments, you are able to receive a higher credit limit.

It is also a virtuous cycle: honouring your credit card payments in time can help you improve your credit score so that you can have better access to other forms of credit as well.

A credit card is different from a debit card

It is the principle of transacting on credit that differentiates a credit card from a debit card. Fundamentally, when a debit card is swiped for any payment, the amount gets deducted from the bank account directly. This means a debit card draws from the funds already existing in your bank account. On the other hand, in the case of a credit card, the money is drawn from your pre-approved limit. It has no impact on your bank balance.

Credit cards can be very convenient for in-store payments, where they can simply be swiped, as well as for online transactions. Credit cards are often also useful when you have to set up auto-payments. The benefits of a credit card do not just end there. Apart from the convenience of hassle-free shopping, credit cards enable short-term zero-interest loan borrowing equivalent to the worth of the purchases. So, if you repay the amount in time before the due date, it can help you build a good credit score, a benefit completely missing from a debit card.

How to be a responsible credit cardholder?

All you have to do, once you’ve secured yourself a credit card, is to ensure that that you repay the borrowed amount within a stipulated time frame to avoid any penalty charges and for the maintenance of a decent credit score.

Apart from that, make sure you follow the usual security guidelines. Do not share your credit card information with anyone even if someone claims to be from the bank or issuing institution, report to your issuer immediately in case of loss or in case you are receiving alerts about unauthorised transactions. Credit cards intend to make shopping a smooth, hassle-free experience so that all you have to deal with is a consolidated bill payment at the end of the month (or whatever time period your provider adhered to).

Finserv MARKETS makes available a host of credit cards to suit the diverse needs a customer may have. The Bajaj Finserv RBL SuperCard offers a host of benefits packed in one plastic chip. How? You can use the same card as a loan card, EMI card as well as cash payment. So no matter what mode you wish to transact in, all you need to do is swipe the card. There are added benefits like convenient conversion of the cash limit approved on the card into a personal loan. The card has a malleable personality in that it intends to cater to your needs in the best manner possible, whether cash, credit or EMI.