A credit card is a financial tool offered by a bank or financial institution, which allows you to borrow funds. A pre-approved credit limit is set by the bank within which you can purchase any product or service both from online and offline stores.
The pre-approved credit limit set by the bank depends on a range of factors which include income, credit score, payment history, and many more. Banks or financial institutions may impose some conditions while providing a credit card like interest or additional charges. Note, that once you exhaust your credit limit, you may not be able to make expenditures using your credit card or will have to pay an additional fee.
Now that you know what a credit card is, let us understand more about how credit cards function.
Now that we’ve covered ‘what is a credit card?’ It's time to move on to explaining how it functions. You can use a credit card to make both online and offline purchases within your stated credit limit. In both these cases, your credit card details get transferred to the merchant’s bank. The bank then sends a verification request to your lender. If your lender verifies your details and authorises the payment it gets processed.
The money will be deducted from your available credit limit and needs to be paid to the lender within a stipulated time window. The grace period or the time between the purchase and payment date can vary from 21 to 25 days depending on your lender. There are no interest charges applicable on the expense if you make the full payment within this grace period.
The top-benefits of credit cards are explained below:
Buy Now, Pay Later - Credit cards are a preferred payment mode that allow you to buy what you need today, while paying for it at a later date. Every credit card comes with a set credit limit that’s applicable on such purchases. If payments are made during the interest-free grace period, you won’t have to incur any additional expenses on the purchase.
Easy EMI payments - You can convert your purchase value into manageable monthly EMIs using a credit card. Doing so helps you manage your immediate financial expenses better. Thus, when you purchase a new TV or mobile, instead of paying for it upfront, you can choose to pay the amount over a flexible repayment tenor.
Redeemable Rewards - Every purchase you make on your credit card earns you reward points. You can redeem these reward points for travel, purchasing lifestyle items or to cover fuel expenses.
Welcome Bonuses - When you apply for a new credit card, you get certain initial bonuses. Depending on your selected lender, such welcome bonuses may include extra reward points or special gift vouchers that can be redeemed at partner stores.
Discounts and Cashback Benefits - You can also score discounts and cashback offers on dining, lifestyle, travel and entertainment spends at select partner stores. These cashback offers are applicable to both online and off-line purchases.
Frequent Flyer Miles and Lounge Access - Credit cards allow you to enjoy a range of travel benefits. From flyer miles and complimentary airport lounge access, some also offer priority check-in, extra luggage allowance, hotel discounts, etc.
Interest-Free Cash Withdrawals - Many credit cards in India allow the cardholder to withdraw cash during emergencies without any interest penalties.
Freedom from Fuel Surcharges - For fuel purchases made using a credit card, you may be entitled to a fuel surcharge waiver. In other words, the transaction charge for fuel expenses is waived by the lender as per the lender’s policies.
Insurance Coverage - Some premium credit cards also offer comprehensive insurance covers like air accident, personal accident and accidental death covers.
Universal Acceptance - Most Indian credit cards can be used internationally, allowing you to travel without worrying about carrying a significant amount of cash.
Easy Auto-payments - Remembering approaching bill payment dates is a hassle. However, with the auto-payment facility of a credit card, you can line-up your recurring payments and never miss a deadline. Additionally, you can also link your credit card to your mobile wallet and online payment platforms to enjoy scan and pay benefits.
Improved Credit Score - Credit rating agencies like CIBIL evaluate your credit score based on your debt repayment history. Thus, paying your monthly credit card bills on time improves your credit score, making you a reliable borrower. This helps you build a strong credit history and avail of loans in the future at a lower interest rate.
A credit card and a debit card differ from one another in various aspects. Here is a brief list of the differences between credit card and debit card:
When you use a credit card, you essentially borrow money. The credit card company pays on your behalf and the dues have to be repaid at a later, predetermined date. However, when you use a debit card, you use existing funds from your bank account.
Since credit cards come with a limit, your usage is restricted to a predetermined credit limit. On the other hand, there are no such limits with debit cards, and your usage is restricted only by the amount that you hold in your bank account.
With credit cards, you will have to repay the amount that you borrowed on or before the stipulated due date. However, since debit cards use existing funds, you don’t have to make any repayments.
If you don’t pay your credit card dues within the stipulated due date, you will be liable to pay a penalty and an interest on the unpaid amount. With debit cards, there are no such obligations.
Credit cards offer exciting rewards, offers, and discounts when you use them for purchases. Although debit cards also offer rewards, they are comparatively fewer.
Debit cards have no impact on your credit score. Credit cards, on the other hand, impact your credit score positively or negatively depending on how you use them.
Along with understanding the meaning of a credit card, it is equally important to also be aware of the components that make up a credit card. Here’s a quick look at these aspects.
The bank or the financial institution issuing the credit card has its logo printed on the card, along with details about its payment network.
Your legal name, as registered with the bank, is printed on the credit card along with a 16-digit card number. That said, American Express (AmEx) issues credit cards with only 15 digits.
The magnetic strip on a credit card contains the credit card data. It is read by point-of-sale (PoS) machines when you swipe your card to pay for a purchase or make any other payment.
The EMV chip is a small chip that can be found on your credit card. Its primary function is to authenticate the card data and produce a unique code for each transaction carried out with the credit card. This makes it difficult for fraudsters to counterfeit your credit card.
The credit card issued to you is valid only for a set period. Both the month as well as the year of expiry are mentioned on your credit card.
At the back of the credit card is a signature box where the cardholder is required to affix their legal signature.
The Card Verification Value (CVV) number is a three-digit number that can be found on a credit card. It acts as an added layer of security, especially during online transactions.
Since the credit needs and lifestyle patterns of consumers differ, picking the best credit card is a subjective task. Here’s a few key pointers you can keep in mind to streamline your search for the best credit card:
Evaluate your Lifestyle and Expense Patterns - Your credit card should ideally fit your lifestyle. From travel to shopping, lenders now offer credit cards that are custom-made for various lifestyle needs. Remember that the type of card you pick has a bearing on the kind of rewards you can avail of. For instance, if you are a frequent flyer, a travel credit card may be the best choice since you can avail of travel rewards like priority boarding, hotel discounts, lounge access etc.
Review Fees and Charges - Credit cards come with certain overhead expenses - fees and charges. For instance, a fee will be levied on the non-payment or part-payment of your monthly credit card bill if you fail to clear it before the due date. Similarly, you also have to pay annual and renewal fees for a credit card. Since these figures vary from one lender to another, you should compare them before signing up for a credit card.
Assess the Lender’s Rewards Program - This helps you understand if the rewards are going to be paid in points, cashback or flyer miles. You can correlate the proposed reward structure with your spending habits and lifestyle to pick a rewards programme that suits you best. Similarly, it is also important to access the process of redeeming your rewards since lenders may only allow this at partner websites or stores.
Check the Payment Options - You wouldn’t want a credit card that comes with a complicated payment procedure. To ensure that your credit bills are cleared efficiently, opt for a card that allows payments through multiple channels.
Look for Add-On Benefits - Check out the other add-on bonuses on credit cards, meaning everything from welcome bonuses to discounts on lifestyle brands and restaurants. Doing so will help you maximise your rewards offered.
The purpose of a credit card is to facilitate cashless transactions, where you can buy a product or service now and pay for it later, before the due date.
Yes. You can apply for a credit card online by visiting the website of a bank or an NBFC. Alternatively, you can apply for credit cards through online platforms like Bajaj Markets.
The minimum credit score required to apply for a credit card tends to vary from one bank to another. However, applicants with a credit score of at least 700 and above have a greater chance of getting a credit card.
There are many banks and NBFCs willing to offer credit cards for first-timers as long as they satisfy the minimum eligibility criteria set by the financial institution. If you’re an eligible individual, all that you need to do is apply for a credit card online through online platforms like Bajaj Markets or on the financial institution’s own website.
The credit score is a three-digit number ranging from 300 to 900. It is used to denote the creditworthiness of an individual. The higher the number, the more creditworthy the individual is.
Credit history, on the other hand, is a record of the debts and other loan obligations that you repay. Financial institutions typically tend to favour individuals with a long credit history and an impeccable record of repayments.
A few of the key things that you should be aware of before applying for a credit card are as follows.
The type of credit card that you require
The maximum credit limit that you’re eligible for
The fees and charges associated with the card
The interest-free period on the card
The kind of rewards that the card offers
If you’re wondering what the use of a credit card is, here are some of the advantages of this financial product.
It eliminates the need to carry cash
It’s widely accepted as a mode of payment
It provides hassle-free shopping experiences
It allows easy cash withdrawals
It comes with a host of discounts, offers, rewards, and cashbacks
It’s useful in case of financial emergencies
It helps improve your credit score
There are different types of credit cards that you can apply for. Here’s a quick look at a few of them.
Secured credit cards
Balance transfer credit cards
Prepaid credit cards
Rewards credit cards
Premium credit cards
Shopping credit cards
Travel credit cards
Cashback credit cards
Lifestyle credit cards
Fuel credit cards
Credit cards issued in India usually come with a validity of 3 years.
You can buy almost anything with a credit card including but not limited to electronic gadgets like smartphones, TVs, tabs and more, flight tickets and event tickets. You can also book hotels and rent cars with a credit card. However, buying a big-ticket item on your credit card makes more sense as you can repay the outstanding cost at a later date. Additionally, buying such items on credit card EMI helps ease your expense burden quite significantly.
Your legal heir will not be responsible for clearing the credit card liability in case of your demise. Since credit cards function much like unsecured loans, there is no collateral against them. Thus, if the cardholder dies, the bank/NBFC has to write-off the debt as well. However, if it is a joint credit card, the surviving co-holder will be asked to clear any outstanding debts.