Credit Card Meaning: The Basics You Need to Know Before Applying 

We’ve all found ourselves in frustrating situations where we wanted to buy something, like a new iPhone or go on a trip with friends, but didn’t have all the money. That’s what credit cards have been made for! They have become an integral part of our financial lives. Credit card meaning? great for things that were once just dream purchases!

Credit cards make it all super easy. Plus, they often come with rewards like cashback or discounts!

But with these benefits of credit cards, it’s important to remember that you must be quite responsible while using a credit card. 

In this article, we will learn the real credit card meaning, benefits and importance of credit cards.

Let’s jump in!

What is Credit Card?

A credit card is a small, plastic or metal card given by banks or financial institutions that lets you borrow money to make purchases.

A credit card consists of several key components.

The card number uniquely identifies the card, while the expiration date tells you until when the card is valid. The cardholder’s name is printed in full for personalisation. 

There exists a bank identification number (BIN) that helps identify the bank that issued the card. The CVV (Card Verification Value) is a security feature that protects against fraud. 

What about the security?

The EMV chip enhances security, and the contactless chip allows for tap-to-pay transactions. 

You’ll also find the card network logo (like Visa or MasterCard) and the issuing bank logo, showing which bank issued the card. Some cards also include a hologram for added security.

When you use a credit card, you’re borrowing money to make purchases. It’s like a “buy now, pay later” facility, allowing you to buy something today and pay for it later. This gives you the chance to leap forward and manage your spending over the upcoming months. So, how do you know when these payments are due?

Let’s take a flying start and explore how a credit card works!

When you use a credit card, you make purchases on a specific day, but you have to pay for them later. You must have often heard your friends talking about how they got a refrigerator or an AC without making any upfront charges with a credit card.

But, if you don’t pay off the balance by the due date, you’ll be charged interest. 

This flexibility is one of the reasons why credit cards are so widely used.

How Credit Card Works – Understanding the Mechanism

Credit cards operate by providing a credit limit, which is the maximum amount you can borrow. At the end of the month, you’ll receive a credit card statement that shows all your transactions and the total amount you owe.

You can choose to pay the full balance or just the minimum amount.

Credit cards typically have a higher interest rate compared to other loans, so it’s important to be aware of all the basics related to credit card meaning and working!

If you don’t pay your balance on time, interest starts piling up about a month after the purchase. But if you pay off the full amount within a set time, usually around 21 days, you can avoid extra charges. This is your grace period — a little breathing room before the interest starts. Just remember, if you’re carrying an unpaid balance from the previous month, the grace period won’t apply to new charges.

Paying off your balance before the grace period ends is a great habit to adopt for a flying start. And make sure you know how your credit card issuer calculates interest — daily or monthly. 

Let us talk about the Khurana family. They recently got a credit card with a limit of ₹50,000. One month, they decide to use their card to buy a sofa for ₹10,000. Now, their total outstanding balance is ₹10,000, leaving ₹40,000 available for future purchases.

Next month, they need to make a payment. The credit card company will ask them to pay at least the minimum amount, say ₹1,500. But if the Khuranas can afford it, they can pay the entire ₹10,000 to clear the balance. If they only pay the minimum, interest charges will start to accumulate, so it’s better to pay off as much as possible.

Understanding Credit Card Usage and Regulations in India: Interest Rates and Repayment

Credit card usage in India is regulated by the Reserve Bank of India (RBI), ensuring transparency and consumer protection. The RBI enforces guidelines on interest rates, fees, and dispute resolution.

Credit card issuers are required to disclose all charges, including annual fees, interest rates, and late payment penalties. The RBI’s Fair Practices Code ensures users are aware of billing cycles, payment due dates, and the process for addressing complaints. 

The interest rate on credit cards in India can be quite high, often ranging from 24% to 36% annually. This means that if you don’t clear the outstanding balance within the billing cycle, you’ll be charged interest on the remaining amount.

Types of Credit Cards You Need to Know

Choosing the right credit card can help you scale up your financial goals. When looking for the best credit card in India, it’s important to be aware of the rewards, annual fees, interest rates, and extra benefits.

Here are some of the most common types of credit cards in India:

1. Rewards Credit Cards

These cards give you reward points for every purchase you make. You can redeem these points for cashback, travel and tours, or more. It’s a great way to earn something back for the things you already buy and spring to new rewards.

2. Cashback Credit Cards

With cashback credit cards, you get a percentage of your purchases back as cash. This means you earn a small amount of money with each purchase, which can fly you to new heights of savings over time.

3. Travel Credit Cards

If you love to travel, travel credit cards are made for you. These cards offer travel perks like access to airport lounges and sometimes even travel insurance. 

4. Fuel Credit Cards

If you drive often, fuel credit cards can help you jump-start your savings. They offer cashback or discounts on fuel purchases, saving you money every time you fuel up and dash towards lower travel expenses.

5. Business Credit Cards

For business owners, business credit cards offer higher credit limits. These cards help scale up both personal and business expenses efficiently.

Benefits of Credit Cards

Credit cards come with a wide range of advantages.

Let’s explore some benefits of credit cards!

1. Convenience

With a credit card, you don’t need to carry cash. Whether you’re shopping online, at the store, or travelling, your card gives you an easy and safe way to pay for things, allowing you to ace it wherever you go.

2. Rewards Program

Many credit cards offer rewards programs. With every purchase, you can earn cashback. This is a great way to spring to new savings with every swipe of your card.

3. Instant Funds

In case of an emergency, a credit card can give you access to instant funds. This can help you launch it when you need money quickly but don’t have it on hand.

4. Build Credit History

Using a credit card responsibly helps you build a good credit history. This is important when you want to apply for loans or need financial support in the future, helping you dash towards better financial opportunities.

5. Purchase Protection

Many credit cards offer purchase protection, such as extended warranties, price protection, and coverage for fraud. This gives you added security on your purchases.

6. Budget Management

With the help of monthly statements and online account access, you can keep track of your spending and scale up your budgeting skills.

Learn how to manage your money better with the 50/30/20 budgeting rule.

Importance of Credit Cards – Do You Need One?

Credit cards play an important role in managing finances. They provide a means to handle emergency expenses, make big-ticket purchases, and manage cash flow. With growing access to online shopping and the ability to book services digitally, credit cards make life more convenient.

1.EMI Options for Big Purchases 

Planning to buy a new refrigerator or a TV but don’t want to spend all your savings? Credit cards let you convert large purchases into EMIs.

2. Special Offers and Discounts 

Credit cards come with plenty of offers – cashback, rewards points, and discounts on flights or shopping. 

3. Interest-Free Credit Period 

Most credit cards offer a grace period, usually between 45-60 days, where you don’t pay any interest if you clear your bill on time. So, you can enjoy the benefits without extra charges if you plan your payments well.

4. Easy Tracking of Expenses 

Every time you make a purchase, it’s recorded on your credit card statement. This helps you track your spending and manage your budget better. 

Disadvantages of Credit Cards

Just like all things in life have their ups and downs, credit cards come with drawbacks, too!

1. The minimum payment on your bill might seem small, but it’s not the total amount you owe. The interest charged is one of the main factors you’ll need to consider. To reduce this interest, always try to pay more than the minimum to avoid falling into this trap.
2. Credit cards seem simple, but there are hidden costs like late fees, joining fees, and renewal charges. Missing a payment can also reduce your credit limit or damage your credit score.
3. It’s tempting to keep swiping your card, but you may not realise how much you’ve spent. Before you know it, you could owe more than you can repay, leading to high interest charges.
4. While rare, credit card fraud can happen. Someone could steal your card details and make purchases without your knowledge. Always check your statements, and if anything seems off, report it immediately.

How to Use Credit Cards Wisely

While credit cards offer many advantages, it’s important to use them responsibly.

Here are a few tips on how to use a credit card wisely:

1.Pay on Time, Every Time

If you don’t pay your credit card bill on time, you’ll have to pay extra fees, and the interest rate can increase. This makes it harder to pay off the balance.

You can always set a reminder or use automatic payments to always pay on time.

2. Pay More Than the Minimum Amount

If you only pay the minimum payment, the remaining balance will start to accumulate interest, which can add up fast and cost you more in the long run.

3. Don’t Spend More Than You Can Afford

A credit card can give you more spending power, but it’s easy to overspend. Just because you have a credit limit doesn’t mean you should use all of it.

4. Monitor Your Spending Regularly

Keeping track of how much you’re spending on your credit card helps you stay within your budget. Every week, you can check your credit card statement or use the mobile app from your bank to keep track.

5. Use the Rewards Wisely

Rewards like cashback, travel points, or discounts can be great perks but don’t get carried away and overspend just to earn rewards.

Let’s say your card gives you 1% cashback on every purchase. If you buy something you don’t need just to earn points, it won’t actually help you in the long run. Instead, use your card for things you’d buy anyway and let rewards add up naturally.

6. Final Tip: Treat Your Credit Card Like a Debit Card

You must spend only what you can pay off when the bill comes. This will keep you from overspending and help you manage your finances without a heavy interest rate load.

Application Process of Credit Cards

To apply for a credit card, you usually need to meet certain eligibility criteria. Some of the comman requirements include:

• A minimum income requirement.
• A good credit score.
• Documentation, including proof of identity, address, and income.

Start savings and investing your money smarter with the best savings app in India!

Conclusion

Credit cards are a convenient financial tool however, you must use it responsibly. There are multiple benefits of credit cards, such as rewards, cashback, and flexibility in payments. However, it is essential for you to understand how they work, the importance of making timely payments, and the impact of interest rates on your monthly income.

Credit Card : FAQs

Source- https://www.rbi.org.in/