credit card basics: all you need to know

your guide from novice to ninja

if you’re new to the world of credit and are trying to find your way around, this might just be the place for you. let’s dive in to understanding the basics of a credit card, how it works, the different types of cards, their cost structure, and how to pick a card that’s best for you.

what is a credit card?
a credit card is typically a plastic card, that grants you access to credit amount that you can use to make payments and avail services. this amount has a repayment time within which the amount is to be paid off. the upside of these cards is that they offer rewards in the form of cashbacks or points. a credit card is issued by a bank or any type of credit lender.

how does a credit card work?
a credit card works like a loan, but instead of receiving money beforehand, you get a set credit limit on the card. the issuing authority sets a credit limit on the amount that can be spent before you have to pay back a specified amount to the lender at the end of the month.

credit cards come with certain benefits.

• you can use a credit card to make a large purchase which can be repaid in smaller installments over a period of time
• a credit card is relatively safer to carry as against cash and is accepted mostly everywhere
• owning a credit card can help you build a good credit score
• if you have a good credit score, you can avail additional cash backs, lower interest rates, and many more exciting offers

while there is an upside, there are also certain signs that you should watch out for.

• if you’re not careful about spending money, you might accrue a large sum of debt which may be difficult to pay back
• you may give in to impulsive purchases knowing that you always have money to spend
• if you fail to repay your monthly dues, not only would you not receive any benefits, but this could affect your CIBIL score as well
• monthly interest over a long time, may sum up to a large amount of debt

so, how do i choose a card that suits me the best?

depending on your requirement, you can find different types of cards.

balance transfer credit cards
these cards allow you to move existing debt to a new credit card offering a lower interest rate. this means you can pay the debt which was built on the other credit card, with a lower interest rate.

credit builder cards
this credit card is aimed at people who want to improve their credit score. it allows them to build a credit report in case you have a poor borrowing history. the interest rates are high, so make sure to use them wisely and repay every month. this will build a steady reputation with the lender.

overseas credit cards
as the name suggests, an overseas credit card allows you to make a payment abroad without incurring an international fee. this eliminates the need for holding cash when you’re on an international holiday, thus making your trip stress-free.

purchase cards
designed for the inner shopaholic in you, purchase credit cards offer a 0% interest when you use them for any kind of purchase.

but that’s not all. there are other types of credit cards offering benefits like air miles, store points, and more.

how should i apply for a credit card?

you can apply for a credit card by filling up an application form, either online or on paper. there are financial representatives who can help out with this too. the details pertaining to the financial background such as annual household income, monthly expenses, etc. would also have to be mentioned in the application.
the time duration of the acceptance of your application for the credit card depends on the application process and the type of credit card you’ve applied for. before applying for a card, it’s advisable to do some research. compare the perks, charges, interest rates and general terms and conditions before you fill the application.
after your credit card application is accepted, the lender will set a credit card limit and offer an interest rate on monthly payment installments. once you receive the credit card, you’ll have to activate it before you can start using it.

how should i use my credit card?

using a credit card is as simple as a debit card - tap, swipe, pay and you’re good to go. but the rules here differ. here are a few things to adhere to while handing these cards.

make repayments on time
you’ll be charged with a credit fee if you miss your credit card payment due date. you may also lose other benefits such as cashbacks and reward points if you’re failing to pay too often. this can affect your credit score and can make it hard to get a loan when you’re in need.  

be cautious about the credit utilisation ratio
the credit utilisation ratio is the credit you’ve utilised in relation to the credit available to you. for example: if you’re allowed a monthly credit of ₹50,000 and you’ve used ₹25,000, your credit ratio would be 50%. the ideal ratio suggested by issuing authorities is under 30% as high borrowing could mean that you’re financially unstable and a high-risk borrower.

pay more than the repayment amount
at the end of each month, you have to repay a minimum amount set by the lender. instead, you could also repay more to help yourself during the months when you’re financially stretched. you will also reduce the interest paid on each installment, making it a cheaper way of repaying the loan.

avoid using a credit card to withdraw cash
you will be charged a fee for every cash withdrawal on your card unless specified in your agreement. it’s advisable to check with your bank beforehand to avoid incurring additional costs.

how much does it cost to use a credit card?

the cost of a credit card depends upon the type of credit card you’ve applied for, and how you use it. here is the breakdown of the potential costs of using a credit card.

interest rates
the interest rate is essentially an amount charged by a lender for borrowing money from a credit issuing authority. you can avoid paying the interest if you repay the entire balance every month, or if you make repayments in advance for the months ahead.

annual fees
an annual fee is a fee you pay every year for the privilege of carrying a credit card. whether an annual fee is worth paying or not, you can decide that by calculating your spending against the rewards you will receive by the end of the year.

late payment fees
this fee is charged when you don’t make the minimum payment by the due date. to make sure that you avoid this type of payment, enroll to auto-pay which will ensure that the balance is paid every month.

things to keep in mind if you’re just starting out

start out with building a credit history. this can be done only if you start out with getting credit. good credit history will be built only if you have been regular in the repayment of your debt.

apply for a secured credit card
a secured debit card requires a cash deposit which protects the cardholder if they’re unable to pay the outstanding bill at the end of the month. the initial cash deposit reduces the risk borne by the issuer. thus, lenders are willing to extend credit cards to people with no credit. however, you’ll still need to show your source of income while applying for a credit card.

get a student credit card
if you’re a student with a thin credit record, you can apply for a student debit card. however, simply being a student is not enough. if you’re under 21, you’ll have to show independent income to get a student credit card.

become an authorised user
being an authorized user means you can use someone else’s credit card for purchases. you’re not legally obliged to pay the debt in this case, the primary cardholder is. the issuer can report the authorized user activity to the credit entities, which can help you build the credit score. for example, if a father adds his son to a credit card which has a good standing for 10 years, the son will receive benefits of those 10 years of credit history.

bottom line

credit card is a great financial tool, provided you use it wisely. it provides incredible ease of access and independence, but at the same time, it’s a debt amount which needs to be repaid to the bank. using it correctly can set you up for financial success, and help you build a fruitful association with a bank in the near future.
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