Credit Card 101 – All you need to know

Credit cards are the ideal means of making payments today. It offers a facility to pay online as well as offline. Modern technology ensures that credit card payments are the most secure of all. Hence, they have become popular with more and more people using credit cards. Let us understand the basics of credit card and learn how to use them to your benefit.

What is a credit card?

A credit card is usually a plastic or a metal card that allows you to make payments for your purchases online and offline up to a specific limit approved by your bank. In other words, it can be explained as you take a loan from your bank every time you use the card. It entails that you have to repay the loan before the due date when you receive your credit card statement.

How do they work?

Every credit card comes with a unique limit. Your bank decides this limit depending on various factors such as your income, repaying capacity, credit score, debts, and so on.

When you use your credit card at the merchant establishment, your bank verifies your details and makes the payment on your behalf. On a specified date, your bank generates your credit card statement informing you about the money you owe to the bank. It grants you a grace period by stipulating a due date before which you have to pay the entire amount to save on the interest component. If you do not pay the stated amount in full and carry forward the balance to the following month, you have to pay interest @ APR (Annual Percentage Rate) for the unpaid amount. Subsequently, every purchase you make attracts interest until the date of payment. In other words, you lose the benefit of the interest-free period.

Difference between a credit card and debit card

Your debit card looks similar to your credit card in its appearance. However, the similarities end here. In the case of a credit card, the bank specifies a limit up to which you can use the card. It is a loan from your bank. You have to repay the same.

On the other hand, the bank links your debit card to your account. Therefore, you can use your debit card up to the extent of funds available in your account. You use a debit card to access your money. There is no question of any repayment to the bank because there is no loan from the bank at all.

Different types of credit cards

With the increasing popularity of credit cards, the level of competition has increased. Hence, banks and credit card issuers have come up with innovative ideas to introduce different types of credit cards. Such credit cards offer additional facilities like cash back, discounts on purchases, reward points, and so on.

You have cards that offer cashback benefits on every purchase you make. Other cards offer discounts and rebates thereby helping you save money. Some cards come with facilities to provide waivers on fuel surcharge and reward points on the purchase of fuel at specific outlets. you can redeem these reward points using a suitable rewards app and get free fuel. You get reward points in the form of air miles when you use specific credit cards with a facility to redeem these reward points and get free air tickets in the future.

There are other credit cards such as low-interest credit cards that come with an introductory 0% APR for a specified period. Balance transfer cards allow you to transfer credit card balances from one card to another. You also have credit cards for people with average or bad credit ratings. Such credit cards require users to maintain a security deposit against which the bank grants you a limit.

Why should you have a credit card?

Debit cards are beneficial because they do not rack up any debt. On the other hand, credit cards help to establish a credit history. Besides, you get various other benefits when you apply for credit cards. These benefits include signup bonuses, accelerated rewards points, a 0% introductory APR period, and so on.

Credit cards allow you to purchase now and pay later. All credit cards come with a 'Cash Advance' facility that will enable you to withdraw cash from ATMs up to a specified limit. A credit card is your best friend in an emergency.

Know these charges

Credit cards do not come free. They come with various costs such as annual/renewal fees, interest payments, late payment fees, balance transfer fees, foreign transaction fees, and cash advance fees, and so on. Proper use of a credit card can help you save on these charges.

How to use your credit card properly

These tips should help you to save money on using your credit card.

●        Use your credit card judiciously. Spend only up to the extent that you can pay.

●        Pay you credit card bill before the due date and in full.

●        Ensure that you maintain the credit balance up to a maximum of 30% of your approved limit. It proves handy while developing your credit record.

●        Do not apply for credit cards too frequently. Wait for a minimum of six months between credit applications.

●        Check and analyse your credit card statement regularly to track your spending.

One should remember that a credit card bill must always be paid on time. Any issues in payments can lead to the deterioration of your credit record. It can affect your future loan applications.

Learn how to use your credit card judiciously and save money in the bargain.