Sep 2, 2024
2 mins read
A credit card is a payment card issued by banks and financial institutions that allows you to make purchases and borrow money up to a certain limit. With the convenience of deferred payment, credit cards have become an integral part of everyday life for many people. But how exactly do they work?
This beginner's guide will cover the basics of credit cards—their meaning, types, workings, benefits, and more. Whether you want to get your first credit card or learn more about using one responsibly, this post will help you understand everything you need.
The first credit cards emerged in the 1900s as store cards issued by department stores and oil companies to let customers make purchases on credit. The Diners Club card launched in 1950 was the first universal credit card accepted at multiple locations. American Express introduced the concept of revolving credit in 1958. Bank of America launched the first modern general-purpose credit card, Bank Americard (Visa), in 1966, followed by Mastercard in 1970.
In India, Bank of Baroda was the first bank to issue a credit card.
Over the decades, credit cards have gained widespread adoption for day-to-day transactions, aided by incentives like rewards programs, global acceptance, and technology advancements like EMV chips and contactless and mobile payments. Today, credit cards are among the most commonly used payment modes worldwide.
A credit card allows you to purchase up to a pre-set credit limit. When you use it, the issuing bank pays the merchant on your behalf. At the end of the billing cycle, you receive a statement showing all transactions, the total amount owed, the minimum due and the payment due date. You must make at least the minimum credit card payment by the due date to avoid late fees.
The remaining balance carries forward, accruing interest. As you pay back the dues, your credit limit replenishes, allowing further purchases. Making full payments by the due date avoids interest charges. Responsible usage helps build credit scores over time.
Here is an overview of the main types of credit cards in point form:
Parameters | Pros | Cons |
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Standard Cards |
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Rewards Cards |
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Secured Cards |
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Balance Transfer Cards |
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Credit cards come with certain interest charges you must be aware of. Interest rate is the percentage charged annually on any outstanding balance carried forward if you do not pay your full credit card bill by the due date. Higher interest rates of up to 42% per annum (can vary) may apply.
Other fees include annual or renewal fees, late payment fees if you miss the minimum due date, over-limit fees if you exceed your credit limit, and foreign transaction fees on international purchases. Before signing up, read the credit card terms and conditions carefully to clarify applicable interest rates and charges. Always make timely payments to avoid incurring hefty interest and penalties.
Here are some tips in point form on how to choose the right credit card for you:
Here are some essential tips for using credit cards responsibly:
Here are some alternatives to using a credit card:
A credit card is like a short-term loan. Using it allows you to borrow money from your credit card provider to make purchases, which you can pay back later—either the Total Amount Due or the Minimum Amount Due. You get up to 50-day interest-free credit period, depending on the card type. In a nutshell, a credit card is a payment tool that gives you access to instant money for the given credit period.
When you make a transaction using a debit card, money gets deducted directly from your bank account. This means you need to have sufficient balance; it’s your saved money being used via a payment tool. On the other hand, a credit card lets you borrow money from your card issuer, which you repay later as per your billing cycle. If paid on time, there’s no interest. Additionally, credit cards offer extra perks like rewards, discounts, and purchase flexibility.
Your credit limit depends on your income, CIBIL score, repayment habits, and sometimes even your existing bank or other pre-owned credit card relationship.
Typically, the fees associated with a credit card include:
The good part is many of these can be avoided with the timely payments and smart credit card usage. Some credit cards even offer a waiver on the joining or annual fee if you meet certain milestone spend criteria.
If you pay your total amount due by the due date, you pay zero interest. But if you make only a part payment or pay just the minimum amount due, interest is charged on the remaining balance. This interest is calculated on a daily basis, so it can add up quickly. Follow the best practice: Always pay your total amount due on or before the due date to avoid interest charges.
A credit card billing cycle is typically a 30-day period during which you can use your card's credit limit. It is like a monthly loan given to you based on your eligibility. At the end of the cycle, your credit card bill is generated with a due date; usually 15 to 20 days later. To avoid late fees and interest, always pay your bill on or before the due date.
Follow a few simple tips: use your credit card regularly, pay your bills on time, and try to use only 80–90% of your available credit limit. When followed consistently, these habits show credit card issuers that you're a responsible user, which helps improve your credit score over time.
Yes, there are plenty of benefits! Credit cards offer reward points, cashback, and discount deals across multiple categories like shopping, travel, gricery & more, on your favorite brands like Amazon, Flipkart, MakeMyTrip, and more. You can also enjoy perks like complimentary lounge access, insurance, and EMI options. If you’re using a credit card like BOBCARD, you can save more on your spends while enjoying added benefits like welcome reward points, complimentary memberships, and exclusive offers.
Beyond just convenience and giving you access to instant money, credit cards offer:
Credit cards can be useful financial tools when used responsibly. They provide payment convenience, rewards, and interest-free periods and help build credit history. However, the risks of overspending, debt traps, and penalties cannot be ignored.
If you lack spending discipline, consider alternatives like debit cards, prepaid cards, and BNPL apps to enjoy benefits without the debt risk. Building healthy money management habits will determine when you are ready for a credit card. Choose wisely based on your financial behaviour.
Click Here to discover the best credit cards at BOBCARD.
The content on this site, including articles, insights, data, and other materials ("Publication"), is provided by BOBCARD for informational and educational purposes only. It does not constitute legal, financial, or credit card advice and should not be considered a recommendation or endorsement of any financial products, credit cards, or services. BOBCARD makes no guarantees regarding the accuracy, completeness, timeliness, or availability of the information provided. We are not responsible for any errors, omissions, or outcomes resulting from its use. Any reliance on the Publication is at the reader’s own discretion and risk. BOBCARD shall not be liable for any losses, damages, costs, or legal consequences (including lost income, profits, or opportunity costs) arising from the use of this content. Readers are strongly advised to seek independent professional advice before making any financial decisions or subscribing to any credit card/financial products or services mentioned in the Publication.
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