What is a Credit Card?
Credit cards are a staple of financial transactions in developed economies. In many developing economies, like India, credit cards are becoming increasingly popular because of their convenience and ease of use. You can use a credit card to buy anything from jewelry to groceries. Having a credit card means that you do not need to have cash with you at all times to make purchases. It is a more convenient method of payment. In very simple terms, a credit card.
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. Using a credit card means that you change the way you pay for your purchases. Every time you make a purchase on your credit card, you are in effect borrowing that money from the credit card issuer until you pay it back at the end of a month.
What is a credit card balance and when do I pay interest on my credit card?
If you pay your bill on time and in full on a monthly basis, you do not need to pay any interest on the money spent on your purchases. The credit card company allows you to use their money that month 'for free' if you repay them in time at the end of the monthly billing cycle. However, if you make only a partial payment, the issuer will charge interest on the remaining outstanding amount - or balance - that will be carried over to the next month's bill.
For instance, if you make purchases worth Rs.20,000, and you pay the amount in full when you receive your credit card bill at the end of the month, you will not incur any charges on using the issuer's money on credit. However, if you pay only say, Rs.12,000, the remaining Rs.6,000 will be added to the next month's bill and you will be charged interest on it.
If I make a few delayed payments, will it affect my credit score?
Some people do not pay their bill every month and make a full payment at the end of a few months, thinking it will not affect their credit score. This is not true. Every delayed or partial payment affects your credit score and makes it difficult to qualify for loans or new credit cards.
Suppose you had a medical emergency in the family and had unexpected hospital expenses. Faced with a temporary shortage of funds, you might think it is okay to make late payments for a few months until you can make a full payment again. You might be confident that your previous good track record will excuse a few delayed payments.
This is not a correct assumption. Making a late or partial payment is probably the worst thing you could do for your credit score. Your repayment history forms up to 30% of your credit score and is the single most important factor in making up your score. Credit rating agencies record every late or partial payment in your credit report and any such marking has a substantial negative impact on your score.
It is therefore important to make sure that you try and pay off your monthly credit card bills in full and on time to avoid doing any long term damage to your credit health.
What does 'minimum due' mean on a credit card statement?
The minimum payment due is the smallest amount you can pay before your Payment Due Date and still keep to the legal terms of your Card Agreement. It is vital to make at least this minimum payment, or there is a chance that the credit card company can consider it a delinquent account, which has serious consequences for your credit history.
What does Payment Due Date mean?
This is the date that your monthly payment is due. Any delay in payment beyond this date can cause the company to charge a late fee, report a late payment to the credit bureau, or even consider the account as delinquent. It is therefore, very important to ensure that you make your payment before the Payment Due Date. There are several online tools that can send you reminders to make your payments on time.
What are the fees on a credit card?
There can be various kinds of fees on a credit card:
Annual fees: When you are approved for a card, you are charged an annual fee as the cost of owning the card. This fee is automatically added to your bill on an annual basis. Some cards do not have an annual fee.
Late fee: If you do not make your minimum due payment in time, you can be charged a late fee. Make sure that you mail your cheque well before the due date, or pay your bill online.
Other fees: Credit card companies charge a variety of other fees which may include charges for exceeding your credit limit or returned cheques.
What does credit limit mean?
Your credit limit refers to the amount of credit available to you on your credit card. However, to maintain a good credit score, it is advisable to spend no more than 50% of your credit limit. So, for example, if your credit limit is Rs.60,000, make sure that you do not spend more than Rs.30,000 every month. Consistently spending more than 50% of your limit signifies that you are short of credit or that you do not have spending discipline. Always make sure that you stay well within your credit limit so that it does not impact your credit score.
How do I apply for a credit card?
Once you have studied the various offers and selected a credit card that best suits your requirements, you can apply for it in two ways: You can go directly to the bank's website and apply for the card online, or you can ask the bank for details on how to apply for a card and the documentation required. Depending on your credit health and other factors, the application can be processed and approved in just a matter of days.
What is the difference between a credit card and a debit card?
The big difference between credit and debit cards is whose money you are using when making your purchases. When you use a credit card, all your purchases are made on your credit card issuer's money. You are simply 'borrowing' the money until you pay it in full at the end of the billing cycle. If you make late or incomplete payments, the credit card issuer charges you interest on the money you owe.
When you make purchases on a debit card, you are using your own money. Your purchase amount is taken directly from your bank account. The advantage of a debit card is that you avoid debt because you can spend only what is available in your account. There is no possibility of spending on credit and making a payment later.
Do credit cards offer protection against fraud?
Yes, they do. If your card is lost or stolen, you have liability is limited. The credit card companies protect you and take over the liability in case it has been misused. If you report the loss or fraud early, the fraudsters will not have access to your bank account.
Card issuers now provide another layer of security with the addition of a PIN number. If you have a microchip on your credit card, you need to input a PIN number as well for the transaction to be approved. Your PIN number is known only to you. So if your card is stolen, it cannot be used for fraudulent purchases as the payment will not be approved without the PIN number.
How many credit cards should I have?
There is no ideal or average number of credit cards an individual should have. It depends on factors like your income, monthly expenses, how you manage your finances and your ability to plan and make timely repayments on multiple cards. If you are new to credit cards, then it is a good idea to use one for some time and get used to the payment method. Once you are comfortable and are confident that you can take on additional repayments, you can apply for another card.
It is also important to note that having an insufficient credit history (not enough credit cards or loans in your name) can also adversely impact your loan application as potential lenders do not have a long enough history to evaluate your repayment discipline. On the other hand, holding too many credit cards simultaneously signifies that you are credit-hungry and need credit from multiple sources to fund your expenses. Lenders might be unwilling to offer loans to someone who seems have too many repayment obligations.
What are the various kinds of credit cards?
There are several kinds of cards on offer in the market. For instance, there are cards that offer air miles based on the amount you spend on your card. Or you can opt for fuel cards that waive the surcharge on fuel. Some cards offer discounts on shopping or restaurants. Some have added security features. Some offer cash back rewards -meaning that you get back in cash a percentage of the total amount you spend on your card. Some cards combine several of these features. As with any financial services product, you need to research the various cards to see which best suits your priorities and lifestyle.
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:
- 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 affect your credit score significantly.
- Do not buy things that you cannot afford, even though you have easy access to credit.
- 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.
- Keep your credit card details and your card issuer's phone number with you in a safe place so you can immediately report any theft or misuse of your card.
- 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.
What is a secured credit card?
A secured credit card works just like a credit card except that you need to make a fixed deposit in order to get a secured card. The bank uses as collateral in case you default on your payment. A secured credit card is typically used by people who cannot qualify for a regular unsecured credit card either because they have bad credit or because they do not have a sufficient credit history. Since a secured card requires collateral in the form of a fixed deposit with the bank, even people with bad or no credit can get a card as the bank is safeguarded against default. It is a simple and quick way to improve your credit score and build your credit history, provided you make all your payments on time.
A credit card is an easy and convenient way to pay for your purchases over time. Any purchase you make on a credit card is on borrowed money that you only have to pay back at the end of the monthly billing cycle. If you use a credit card wisely and responsibly it can be a safe and convenient way of managing your payments.
