What is a credit card?

What is a credit card?

Credit card allows you to borrow money on a monthly basis to make purchases. When you buy something using your credit card, you are using your credit card issuer’s money until you pay off the amount when you get your credit card bill at the end of a month

What is a credit card?

Credit cards are a widespread and extremely popular method of payment in developed economies.  In more developing economies, like India, an increasing number of people are choosing to use a credit card because of the convenience, safety and ease of use. Once you start using your plastic card, you might never want to go back to paper cash! You can use a credit card to buy anything from jewelry to vegetables.

But what is a credit card?  In very simple terms:

  • i. It allows you to borrow money on a monthly basis to make purchases. When you buy something using your credit card, you are using your credit card issuer’s money until you pay off the amount when you get your credit card bill at the end of a month
  • ii. It enables you to make cash withdrawals from an ATM in case of an emergency –for example, if you are in a foreign country and need cash; or do not have your ATM card with you; or do not have time to go to the bank to withdraw cash from your account, you can use a credit card to make a cash withdrawal from an ATM machine.  You will be charged a fee for using your credit card to make cash withdrawals from an ATM, so it is advisable to do so only when required.

How do credit cards work?

A credit card does not mean that you have more money. It only means that it gives you more time to pay for your purchases.  Every time you buy something on your credit card, you are actually borrowing that money from the credit card issuer until you pay it back at the end of a month. Using a credit card means that you change the way you pay for your purchases.

How do I choose the best card?

The only way to choose the best card is to research the features and benefits of the various cards on offer to judge if it suits your credit needs. Each person has different requirements for their card. You will need to check the interest rate charged on the balance, whether the credit limit suits your spending pattern, whether using the card offers any rewards or benefits ( like air miles or shopping discounts), the security features in case of fraud or theft, and the various fees charged including annual fees, late fees etc. Compare the features of various cards to see which is most suitable for you.

What are some tips for a new credit card user?

If you are new to credit cards, then it is important to ensure that you maintain a healthy credit history and use your card wisely to avoid any damage to your credit profile. Here are some tips for ensure that you remain credit-healthy:

  1. 1. Always pay your bills in full and on time. Every single late, missed or incomplete payment is reported by your credit card provider to the credit bureaus. This will adversely affect your credit score. Making all your monthly payments is the single most vital thing you can do to maintain your credit health and have access to loans and other credit cards in the future.
  2. 2. Do not spend more than 50% of the credit limit on your card. The less you spend, the better it is for your credit score.  Do not buy things that you cannot afford, even though you have easy access to credit.
  3. 3. Keep your credit card details and your issuer’s phone number with you in a safe place so you can immediately report any theft or misuse of your card.
  4. 4. Retain your credit card sales slips so that you can check it against your monthly credit card statement. Any discrepancies or mistakes should be reported immediately, as they can be reversed.

 Read all the terms and conditions carefully when you first get your credit card so that you are aware of all the interest charges, fees and other terms of agreement on the card.

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