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.

 

History of Credit Cards

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.

 

How Does a Credit Card Work?

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.

 

Types of Credit Cards

Here is an overview of the main types of credit cards in point form:

• Standard Cards - Basic credit limit provided, no special benefits
• Rewards Cards - Offer cashback, special reward points or miles on purchases
• Secured Cards - Require security deposit like Bank FD, help build credit
• Balance Transfer Cards - Shift debt from other cards at lower interest
• Business Cards - Benefits tailored for business expenditures
• Student Cards - Help students build credit history
• Premium Cards - Luxury perks require excellent credit
• Add-on Cards - Allow primary cardholder to share the card account via separate cards with eligible family members 
• Co-branded Cards - Tied to specific brands or loyalty programs

 

Pros and Cons of Using a Credit Card

Parameters	Pros	Cons
Standard Cards	Easy to obtain Low or no annual fees	No rewards or cashback Higher interest rates
Rewards Cards	Earn cashback, points or miles Redeem for statement credits, vouchers, flights, hotels etc.	Higher annual fees Rewards subject to T&Cs
Secured Cards	Help build or rebuild credit Get your security deposit back after responsible usage	Require security deposit upfront Lower credit limits
Balance Transfer Cards	Save on interest charges Get promotional 0% APR for the intro period	Balance transfer fees are applicable Interest kicks in after the intro period

 

Understanding Interest Rates and Fees

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.

 

How to Choose the Right Credit Card for You

Here are some tips in point form on how to choose the right credit card for you:

• Analyse your monthly spending and identify major expense categories (groceries, travel, fuel, etc.)
• Look for cards that offer maximum rewards or cashback in those spending categories.
• Compare interest rates and charges across different cards and issuers
• Evaluate credit limits and pick one that matches your requirements
• Consider balance transfer or low foreign transaction fee cards if relevant for you
• Opt. for a card from a reputable issuer with good customer service
• Avoid cards with high annual fees or expensive add-ons you won't use
• Read eligibility criteria carefully and apply only if you meet the requirements
• Start with a basic card if you have limited credit history

 

Tips for Responsible Credit Card Use

Here are some essential tips for using credit cards responsibly:

• Pay bills in full and on time to avoid interest charges.
• Spend only what you can repay by the due date.
• Maintain credit utilisation below 30% of the limit.
• Review statements regularly and report unauthorised charges.
• Avoid cash advances which incur immediate interest.
• Never share card details except when making a purchase.
• Use EMIs only for large essential purchases, not small expenses.
• Set up alerts for due date reminders and monitoring activity.
• Carry only required cards when stepping out to limit misuse.
• Stick to a credit card spending budget to avoid debt traps.
• Build credit slowly over time through modest but regular and prompt card usage.

 

Alternatives to Using a Credit Card

Here are some alternatives to using a credit card:

• Debit cards - Make purchases directly from your bank account balance instead of taking a loan. Useful for limiting spending.
• Prepaid cards - Load a pre-determined amount to the card and spend only that much. Avoid debt.
• Buy now, pay later apps - Pay for purchases over interest-free instalments but avoid credit card debt.
• Personal loans - Borrow money at lower interest rates for big expenses instead of credit card debt.
• Paypal, UPI, mobile wallets - Make payments directly from linked bank accounts without needing a credit card.
• Automatic bill payments - You can set up auto-pay for utility bills, EMI payments, etc., directly from a bank account.
• Cash/Cheque payments - For offline purchases, pay by cash or cheque to limit credit card expenditure.
• Layaway programs - Pay for purchases over time by making instalments but get the item later.

 

Conclusion: Is a Credit Card Right for You?

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.

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