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What is credit card bannner

Understanding the Basics: What is a Credit Card?

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.

 

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.

 

FAQ's on What is a Credit Card?

Q1. What is a credit card in simple terms?

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.

Q2. What is the difference between a credit card and a debit card?

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.

Q3. How is the credit limit on a credit card determined?

Your credit limit depends on your income, CIBIL score, repayment habits, and sometimes even your existing bank or other pre-owned credit card relationship.

Q4. What are the fees associated with credit cards?

Typically, the fees associated with a credit card include:

  • Joining fee (if it’s a paid card)
  • Annual fee (varies by card)
  • Late payment charges
  • Over-limit fees
  • Cash withdrawal fees

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.

Q5. How does interest work on credit cards?

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.

Q6. What is a credit card billing cycle and when do I need to pay?

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.

Q7. How can I improve my credit score using a credit card?

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.

Q8. Are there rewards or benefits for using credit cards?

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.

Q9. What are credit card benefits?

Beyond just convenience and giving you access to instant money, credit cards offer:

  • Reward points and cashback
  • Discounted deals on popular brands
  • Flexible EMIs
  • Opportunity to build your CIBIL score
  • Fraud protection
  • In short, it’s not just a card—it’s a tool for making smart spends while enjoying a host of exciting benefits.

 

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.

Click Here to discover the best credit cards at BOBCARD.

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Disclaimer

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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