What is a credit card, how does it work and what are its advantages and disadvantages. This can be very useful in shopping and making online payments. But while its benefits are there, it also has its disadvantages. Credit card information, how it works and what should be kept in mind while using it, everyone knows this in detail. Read here what is a debit card and the difference between a debit card and a credit card on our site.
Credit Card meaning
A credit card is a card issued by a financial company that enables the cardholder to borrow money up to the limit issued on the card. It can be used as a purchase and payment for services. The credit card that can be used to show credit purchases and pay later is called Credit Card. The condition of issuing this is that the cardholder will pay the borrowed amount and additional agreed charges if any. The issuing bank determines the extent of lending based on the credit rating of the individual and the ability to repay the loan.
Credit Card is easy to use
Credit card consumers have to pay higher rates than ordinary loans and other forms of credit lines. The interest charge on the amount taken from the card usually starts one month after making the purchase. It is one of the most popular forms of payment for consumer goods and services and almost every business accepts payment for products and services through Credit Card.
In lieu of a fixed deposit
Many banks issue credit cards in exchange for fixed deposits. Those who do not have a good credit rating can take these in exchange for fixed deposits. Banks can issue these with a lending limit of up to 90% of the fixed deposit amount. The rate of interest on such a credit card can be lower than a normal credit card.
Interest on credit card
Credit cards issue monthly statements to customers detailing their purchases and usage. The customer has to pay by the due date. If the customer does not make full payment by the due date, then he has to pay interest. Banks usually charge 30% to 36% per cent annual interest on the amount payable.
How Credit Card Works?
We can use a credit card online or offline. It can be used online to buy something from e-commerce sites or to pay its bills online. Offline usage can be used to pay in shops, hotels or many other establishments.
For online shopping, we need the card number, CVV, expiry date and OTP of the card. Whenever you shop online, for payment, e-commerce sites send you to the payment gateway site where you have to fill all this information.
When you buy something in a shop, petrol pump, restaurant etc. or an institution or pay a fee, you present your credit card over the counter. Those taking these payments are called sailors or merchants. Marchant has a POS machine in which he inserts and removes the card. POS machines process the payment by reading the information from the chip on the card. In this machine, you have to enter the PIN of the card.
Withdraw money at ATM
Most credit cards can be used to withdraw as much of the cash credit limit given on the card from the ATM. But card companies charge interest on the customer’s cash advance. Interest on cash advances is usually charged from the withdrawal date rather than the monthly billing date. Many card companies also charge commissions for cash withdrawals.
Types of Credit Cards
A variety of Credit Cards is issued by banks based on features, rewards and benefits. Customers can choose a credit card for themselves according to their usage and needs. The payment networks that banks issue cards with are Visa, MasterCard, RuPay Card, American Express and Diners Club. Credit cards are issued mainly in the following categories:
- Fuel credit card
- Business credit card
- Contactless card
- Prepaid card
- Travel Credit Card
Fuel Credit Card
On the fuel credit card, the customer gets a benefit when the transaction is done at a petrol pump. These cards help customers get cashback offers and rebates from a surcharge on taking patrols. Some banks also offer reward points on purchasing fuel. These reward points can be redeemed for refuelling. Other additional benefits available on the Fuel Credit Card include activation bonuses, movie tickets, hotel coupons, etc.
Business Credit Card
Business and Corporate Credit Cards are given to business establishments, corporate and other financial institutions where employers can provide credit cards to their employees and can easily keep track of the expenses on the card. These cards cannot be used by employees for personal transactions and are valid only for the duration of their employment with the company. Corporate Card offers options on hotel stay and travel, rewards, insurance, discount on fuel surcharge, use of airport lounges, reward programs, cash advances, add-on cards, bill payments and converting purchases to EMIs. Companies also get the option to have their company name printed on these credit cards.
Classic Credit Card
Classic Credit Cards come with international acceptance and feature revolving credit, cash advance, interest-free credit period, reward program, addon card, insurance and dedicated 24/7 customer care helpdesk for customers. Most classic credit cards do not charge annual fees or joining fees.
Co-Branded Credit Card
Co-Branded Credit Cards are offered by banks in association with retail brands, travel aggregators or any other financial institution which gives customers dual benefits through a card. The most successful co-branded credit cards are issued with retail chains as banks can easily expand their customer base through customers of retail outlets. Depending on the tie-up, retail partners in co-branded credit cards can offer discounts and offers from the brand.
Contactless Credit Cards
Contactless Credit Cards are equipped with unique payment technology. Its cardholders can pay by taking their card to the POS terminals without touching it. These contactless transactions do not require customers to enter any PIN to make purchases.
Prepaid Credit Card
In a Prepaid Credit Card, the cardholders load a certain amount first and then use that money to make purchases. Although these cards do not offer credit to customers, customers can take advantage of most of the features of credit cards that are offered by other types of credit cards.
Travel Credit Card
Travel Credit Cards are very popular as they provide a variety of travel benefits to customers. These cards provide cross benefits of travelling not only in India but also abroad. Most banks have tied up with airline companies or travel companies to offer travel credit cards. When customers use this card to do travel transactions, they can create air miles. Also, some travel cards allow customers to enter the airport lounge. Customers earn reward points on these cards which can be converted into air miles. These air miles can be used to book flight tickets and upgrade seats. Hotel and holiday offers, golf offers, dining offers, travel insurance etc. can also be found in the travel card.
Words and terms related to Credit Card and their meanings
Here we are explaining the meaning of the words and terms related to Credit Card. If you are applying for a credit card, then it is better to understand all these.
Joining Fee and Annual Charges
Some banks charge Joining Fee and Annual Charges for credit cards. Check before taking the card because some companies even forgive them for getting new customers.
Billing Cycle is the interval in which a statement is made after one statement. Most of the time it is 30 days. After a 30-day billing cycle, usually, 20 days are available for payment. Thus, if the purchase is made on the first day of the billing cycle, you can get up to 50 days to pay without any interest or interest. This period may be different for different cards.
The Grace Period is the period that occurs between the due date and the day the card statement is created. During this period, no interest is payable on making full payment.
A part of the total due amount in the card statement must be given Minimum Due or more before the due date. The remaining portion is added to the next statement with interest. Fines are imposed for not giving Minimum Due.
Since we can postpone the remaining amount for the next billing cycle by giving a part of the amount due on the card, this facility available on the credit card is called Revolving Credit. This is a kind of outstanding balance transfer facility that should be used consciously.
The credit limit is the limit of spending that a cardholder can spend. Card companies determine this according to the cardholder’s income. Companies may also change this limit from time to time. If the cardholder makes a payment in full or less at the end of the credit limit, then the credit limit becomes available again accordingly.
Reward Points, Credit Points, Air Miles and Cashback
It is a variety of loyalty programs that card companies run. Their purpose is to encourage customers to use more and more cards and to continue membership of the card.
Credit Card Number
This is a sixteen-digit number embossed on your card. This is required for online shopping. This number is embossed on the card so that it can be printed on a paper slip. Nowadays, because the paper slip is not used, the card number is not embossed on some cards.
The full form of CVV is the Card Verification Value. This three or four-digit code is written near the signature panel on the back of the card. It is used to provide additional security to the credit card account at the time of online shopping. Card number, CVV code, the expiry date of card and OTP are required at the time of online shopping.
The full form of OTP is One Time Password. As soon as you enter the details of your card at the time of online shopping, only your bank sends OTP to your registered mobile number. This is also for your safety as your OTP is available on your mobile and can only be used for some time.
When you make an offline purchase, the merchant means your payment process by putting your card in the POS machine. You have to enter your PIN in the machine. The POS machine connects to your card account via internet or mobile SIM and completes the payment process.
The use of credit card makes the transaction easy but it should be used only with careful consideration. Because we do not have to make any payment at the time of use of the card, it may be that while shopping, we do not take into consideration whether we will be in a position to repay it when its bill comes. That is why it should be used only when it is thoughtful and very important. To understand the restrained use of credit cards read our article Saving Money.
After knowing what is a credit card and what are its uses, it must have been understood that it should be used sparingly and that a thoughtless purchase can also lead to regrets.