Basics of Credit Cards

In this digital era Credit Cards have become almost inevitable. They are as common as Smart phones. Salaried individuals as well as Businessmen, all encounter the issue of carrying cash with them. A Credit Card not only relieves one from carrying physical cash but also offers credit for the money spent while making various purchases, at least for a few days before you pay. 

Financial institutions issue Credit Cards and allow to borrow funds from a pre-approved limit to pay for all the purchases you make.  Whenever you swipe a Credit Card, the money is taken from this pre-approved limit. They are in the form of a thin rectangular piece of plastic or metal. The Credit Card helps to make payment for all online and store/shop purchase transactions. 

The issuing bank creates a revolving account enabling the card holder to borrow money for payment to a merchant.

How to get a Credit Card and what do the details printed on it mean?

Any Indian citizen who is 18 years of age, whether salaried or self-employed can apply for a credit card. However, the minimum income criteria are decided by the issuing bank. Among the other requirements are the ID Proof like a Passport, PAN card, Aadhar Card, Residential proof again like Aadhar Card, Electricity Bill, Telephone Bill and Income Proof-Salary certificate, employment letter in case of a salaried individual and Certified Financials and Recent ITR Statement in case of a Self-Employed person. 

Compare the Credit Card offers and select the one which suits you as per your need. You can choose a card depending upon your spending pattern, various offers and welcome bonus on the card, interest rates charged by the bank and payment options available. Both online and offline applications are possible. Due to the Pandemic situation, the credit card application has been made simpler and faster through digitization. 

A typical Credit Card shows the name of the issuing bank, EMC chip if it is a smart card, Hologram, Card number, Card network logo, Expiration date, Card holder’s name, and a contactless chip.

How does a Credit Card work?

When you visit a shop to buy something and use a credit card, the process will be as under:

  • When your card is swiped at a shop it gets inserted into a point-of-sale machine. You are asked to enter a PIN after confirming the amount to be paid to authenticate the transaction. Where a PIN is not required, the shopkeeper will take your sign on the receipt printed by the machine.
  • The machine reads the chip giving information about your identity to the issuing bank and the bank approves the purchase. 
  • The machine prints two copies of receipts out of which one is given to the customer, and another one is kept by the shopkeeper.
  • The retailer/shopkeeper gets the money after a few days, whereas you will be billed for the transaction in the next statement.

In case of online transactions, the process will be as follows:

  • After choosing a product when you move to the options for payment, you will be asked to choose a Visa or MasterCard.
  • Next step will be to enter the 16-digit card number along with its expiry date and CVV, also the name appearing on the card.
  • By pressing the pay button, the bank sends an OTP to your registered mobile number or e-mail address. Once the OTP is entered correctly, the amount is deducted from the available credit limit.

Advantages and Disadvantages of Credit Cards

Credit card lets you make a purchase and pay for it later. You can plan a big purchase in a way that doesn’t impact your finances. Responsible use of Credit Cards boosts your credit score. There is a zero-interest period where no interest will be charged by following your minimum monthly repayment cycles. You can earn cash backs and rewards by using Credit Cards. You can track your spending as a monthly credit card statement is sent by the bank. The purchases made via a Card are protected as one can vouch for the veracity of the claim when the proof of purchase is lost, stolen or destroyed. 

The ‘minimum due’ amount needs to be understood and can’t be misinterpreted as ‘total due.’ A customer might keep on spending more due to this misunderstanding. Credit cards charge several fees and taxes. Missing your card too may result in a negative impact on your credit score. Failure to clear your dues on the due date means you must pay an interest which could be as high as 3% per month on an average. As the bank balance doesn’t get affected, the limits set for Credit Cards are forgotten and leaves you with a habit of spending more. Though rare, there are chances of credit card frauds too. Banks however don’t charge for the payments if the fraud is proved. 

How to use your Credit Card mindfully?

  • Don’t get tempted to get a Credit Card because of the calls and emails as they may end up compelling you to spend more.
  • Understand your limits. Do not spend frivolously because of the credit allowed. Keep track of how much you spend. Do not spend more just to be eligible to the discounts and rewards. 
  • While selecting a Credit Card, choose the one that matches with your requirements. For an example if you spend more money on fuel, choose a card which offers discounts on purchases of petrol and diesel. There are hidden costs of enjoying the Credit Card facility. Use it only when it is equivalent to using money out of your pocket. 
  • Read the reward or cash back related terms and conditions as they are bound to change by the issuing bank. Keep yourself updated about how to redeem them. 
  • Follow the repayment cycles strictly. Bonus or reward points are not worth when you are charged with a penalty for delaying payment. On the contrary it will affect your credit rating negatively. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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