What is a Credit Card: Meaning, Uses and How It Works

The number of Credit Card users has increased significantly in recent times. While getting a Credit Card has now become easy, not many people know how to make the most of it. If you are new to Credit Cards, this blog post will be useful to you as it gives insights into what is a Credit Card, its benefits, uses and types.

What is a Credit Card?

A Credit Card is a financial instrument that allows you to avail of credit on all your financial transactions. In simple terms, a Credit Card is a debt instrument (like a loan) that allows you to buy things now and pay for them later. All Credit Cards come with a specific credit limit, which is set by the issuer based on your credit score and your eligibility criteria.

Important Credit Card Terms

1. Credit Limit

The credit limit denotes the maximum amount a Cardholder can borrow on their Credit Card. The Card issuer determines it based on the income, credit score and repayment history of the Cardholder. Exceeding the credit limit may incur over-limit fees or lead to declined transactions.

Managing your spending within this limit is vital to maintaining a positive credit standing and avoiding additional charges.

2. Interest Rates

Interest rates, expressed as Annual Percentage Rates (APR), signify the cost of borrowing money on a Credit Card. They can vary based on the Card issuer and may fluctuate due to market conditions and individual creditworthiness. Understanding interest rates is crucial as they affect the total amount owed on the Card, if the full amount owed is not paid each month. Managing Credit Card balances responsibly can help minimise interest charges and maintain financial stability.

3. Fees and Charges

Credit Cards come with various fees and charges, such as annual fees, late payment fees, cash advance fees and foreign transaction fees. These fees can significantly impact the overall cost of using a Credit Card. You can make more informed choices by being aware of these charges and considering them when budgeting and making financial decisions. This understanding can help you avoid unnecessary expenses and manage your finances more effectively.

Types of Credit Cards

To find the best Credit Card in India, consider factors such as rewards, annual fees, interest rates and additional perks. It is important to do research and compare different options to find the Card that aligns with your financial goals and lifestyle needs. There are various types of Credit Cards, each tailored to different needs and lifestyles. Some of the best Credit Cards are:

1. Rewards Credit Cards

These Cards offer reward points on every purchase, which can be redeemed for cashbacks, travel / air miles or merchandise.

2. Cashback Credit Cards

These Cards earn you cashback with every purchase you make. The amount you earn is usually a percentage of each purchase.

3. Travel Credit Cards

Ideal for frequent travellers, these Cards offer travel-related perks such as airport lounge access, air miles and travel insurance.

4. Fuel Credit Cards

Designed for individuals who frequently travel using their vehicles. Fuel Cards offer cashback or discounts on fuel purchases.

5. Secured Credit Cards

Secured Cards require a security deposit but can help build or rebuild credit scores. They are suitable for individuals with a limited or poor credit history.

6. Business Credit Cards

These Cards cater to business owners, offering expense-tracking tools, rewards and higher credit limits.

How do Credit Cards work?

Credit Cards work as convenient financial tools. They provide a predetermined credit limit to users, allowing them to make purchases up to that amount. Each transaction carried out with a Credit Card basically means borrowing money from the Card issuer.

At the end of the billing cycle, users receive a detailed statement of their transactions and the amount owed to the issuer. Users can pay the full amount or a minimum amount by the due date. However, if the full amount is not paid, interest (usually at high rates) is charged to the user.

Credit Cards offer various benefits, such as reward points and cashback. Responsible Credit Card usage can help individuals build a positive credit history, which can help them obtain loans and financial assistance in the future. However, late payments can lead to additional fees, penalties and negative impact on credit score.

Credit Card Benefits & Features

Credit Cards offer a range of features and benefits for different financial needs, making them a valuable tool for managing finances and enhancing purchasing power. Some of these are:

1. Convenience

Credit Cards offer a convenient payment method for online, in-store and international purchases, eliminating the need for carrying cash.

2. Rewards Programme

Many Credit Cards have a rewards programme, allowing Cardholders to earn reward points, cashback or travel / air miles on every purchase.

3. Instant Funds

Credit Cards provide access to emergency funds during unforeseen circumstances or financial emergencies.

4. Build Credit History

Using Credit Cards responsibly can help build a positive credit history, which is essential for obtaining loans and financial opportunities in the future.

5. Purchase Protection

Credit Cards often offer purchase protection, including extended warranties, price protection and fraud liability coverage.

6. Travel Benefits

Certain Credit Cards offer travel-related perks, such as airport lounge access, travel insurance and discounts on flights and hotels.

7. Loan on Credit Card

ICICI Bank offers a Loan on Credit Cards for eligible ICICI Bank Cardholders, providing a convenient solution to manage financial emergencies. This Loan allows you to convert your urgent expenses into easy monthly instalments (EMIs), making it simpler to handle unforeseen costs without straining your finances.

8. Budget Management

Credit Cards provide a convenient way to track expenses and manage budgets through monthly statements and online account access.

9. Special Offers

Cardholders may receive special offers, discounts and exclusive deals from partner merchants and retailers.

10. Contactless Payments

Many Credit Cards now feature contactless payment technology, offering a faster and more secure way of carrying out transactions.

The maximum credit limit sanctioned to Credit Card users differs from user to user based on their eligibility criteria and their credit score. When you apply online for a Credit Card, ask the issuer for the highest possible credit limit. Apart from increasing your purchasing power, the higher credit limit will also improve your credit score.

Credit Card Eligibility & Documents Required

Eligibility Criteria

• Minimum Age: 21 years

• Maximum Age: 60 years

• Credit Score of 750 or above

• Stable employment and income.

Documents Required

• Proof of Identity (Aadhaar Card, Passport, PAN Card)

• Proof of Address (Utility Bill, Rental Agreement)

• Bank Statement

• Income Proof like Salary Slips and Income Tax Returns.

How to Use Credit Cards Smartly

• Understand the rewards

Most Credit Cards in India come with reward programmes and offers on certain types of spending. Some high-end Cards provide complimentary access to the airport lounges, while others provide additional reward points on purchase of groceries or fuel. Do your research well about the reward point system and use the Card strategically, so that you get the best out of the Card’s rewards and benefits.

• Pay your dues diligently

Credit Card companies impose high interest rates and penalty fees on outstanding dues and late repayments. Make sure that you pay your dues on time to avoid paying heavy interest and penalties. Paying dues fully and on time will also improve your credit rating.

• Don’t use a Credit Card to withdraw cash at an ATM

You can use a Credit Card to withdraw cash from an ATM. However, it is advisable that you avoid using this facility unless it is an emergency. ATM withdrawal attracts heavy Credit Card interest rates.

• Don’t pay just the minimum amount payable

A lot of people have the wrong notion about Credit Card payments, that paying the minimum amount is enough. However, Credit Card issuers charge a hefty interest on the balance amount. Do try to pay the dues in full every month to avoid paying these charges.

• Check your statement carefully

Apart from paying your bills on time, make sure that you scrutinise your monthly Credit Card statement and understand what charges have been levied. Also check for any suspicious transaction or transactions not carried out by you. This could be because of Credit Card fraud. Never share your Credit Card details with anyone.

• Use your Card only at trusted stores

If you use your Credit Card for online purchase or for buying things from a store, make sure that the retailer is a trusted one. This will minimise the risk of Credit Card identity theft.

Keeping an Eye on Your Credit Card Spending

Maintaining a close watch over your expenditure is of utmost importance, especially when it pertains to Credit Cards. These plastic Cards can be incredibly convenient but without careful management, they can quickly lead to escalating spends and financial trouble. To help you stay on top of your Credit Card expenses, consider the following pointers:

1. Set a Budget:   Establish a monthly budget that includes specific allocations for Credit Card payments. This will give you a clear picture of your financial obligations and prevent overspending.
2. Track Your Purchases: Keep track of every transaction you make using your Credit Card. Utilise digital tools such as mobile banking apps or personal finance apps to monitor and categorise your spending.
3. Be Mindful of Interest Rates: Credit Cards often come with high interest rates. If you carry unpaid dues on your Credit Card, the interest charges can accumulate rapidly. Paying off your balance fully each month can save you from unnecessary interest expenses.
4. Avoid Impulsive Buying: Before making a purchase, ask yourself if it is a necessity or an impulsive desire. Consider waiting for a day or two before finalising a non-essential purchase, giving yourself the time to evaluate if this purchase aligns with your financial goals.
5. Utilise Credit Card Rewards: Many Credit Cards offer reward programmes such as cashback or travel points. Take advantage of these benefits by using your Credit Card strategically for purchases that you would make anyway. However, ensure that you can pay off the balance.

By implementing the above pointers, you can maintain control over your Credit Card spending and prevent debt from spiralling out of control. Remember, financial responsibility starts with being aware of your spending habits and making informed decisions.

Conclusion

As the number of Credit Card users continue to rise, it is essential to understand how to make the most of this financial tool. By getting a higher credit limit, understanding rewards, paying dues diligently, avoiding cash withdrawals, paying more than the minimum amount, checking statements carefully and using the Card at trusted stores, you can navigate the Credit Card landscape wisely. Maintaining a watchful eye on your spending habits is crucial to prevent financial missteps and ensure a healthy financial future. Remember, financial responsibility and awareness are key to making the most out of your Credit Card. So, apply for a Credit Card with confidence and use it smartly to optimise your financial journey.

FAQs

1. What is the difference between Debit Cards and Credit Cards?

The main difference between Debit Cards and Credit Cards is the source of the money. With a Debit Card, you spend money directly from your bank account, so you can only spend what you have. But with a Credit Card, you borrow money from the bank or Card issuer, which you must repay later.

2. What is a Credit Card limit?

A Credit Card limit is the maximum amount of money you can borrow on your Credit Card. The Card issuer sets this limit based on your income, credit score and repayment history. Exceeding the credit limit may result in additional fees or declined transactions.

3. Does ICICI Bank provide a RuPay Credit Card?

Yes, ICICI Bank offers the Coral RuPay Credit Card. RuPay is a domestic Card network in India and the Coral Credit Card is one of ICICI Bank's offerings within the RuPay network. It provides various benefits such as reward points, discounts and offers on dining, shopping and entertainment.

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