A credit card is a payment card that allows cardholders to make online and in-store purchases on credit. Credit cards are issued by financial institutions based on card applicants’ credit history and other factors. Cardholders can use credit cards to make purchases up to a certain limit. The card limit is capped by the card issuer based on the cardholder’s credit history, income and other factors.

How Does a Credit Card Work?

Eligible cardholders can apply for a credit card from a financial institution. The card issuer would then review your credit history, income and other factors to determine whether you are eligible for a credit card and what your credit limit will be. Once your application is approved, the issuer will offer you a credit limit.

You cannot make transactions beyond this credit limit, however, you can request your card issuer to increase the limit in case you’re not satisfied with the existing one. Now coming to using a credit card to make purchases, bear in mind that for every transaction made you are essentially borrowing money from the credit card issuer. The issuer pays the merchant on your behalf and you receive a bill for the amount you owe. You can check your credit card bill via net banking. Note that the card issuer will charge you interest if you don’t pay off the outstanding balance.

Credit cards can be subdivided into categories based on their type like cashback credit cards, reward credit cards, fuel credit cards, travel credit cards, etc.

What are the Different Types of Credit Cards?

There are different types of credit cards that you can apply for at a financial institution. These are:

Rewards credit cards
Travel credit cards
Cashback credit cards
Balance transfer credit cards
Business credit cards
Student credit cards
Secured credit cards
Store credit cards
Co-branded credit cards
0% intro APR credit cards and low-interest credit cards
Fuel credit cards
Contactless credit cards
Entertainment credit cards
Gold credit cards
Lifetime-free credit cards
Gold credit cards
Silver credit cards
Classic credit cards
Lifestyle credit cards
Platinum credit cards
Titanium credit cards
Government-backed credit cards

Also Read

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Features of a Credit Card

The main features of credit cards are as follows:

1. Credit Limit

Every credit card has a fixed credit limit which the card issuer determines. The cardholder can spend only up to the credit limit of the card. Moreover, there are two types of credit limits: one is normal, and the second one is revolving.

2. Cash Alternative

It is not always feasible to carry cash everywhere. Moreover, if you are travelling abroad and do not have that country’s currency in your hand, a credit card will come in handy. Also, ATMs may not be available everywhere, so credit cards have become a great cash alternative.

3. Keeps Records of all Transactions

Credit card issuing institutions like banks and NBFCs keep records of all the cardholder’s transactions. This ensures proper billing, and users can also keep track of their expenses.

4. Cashback, Rewards and Other Offers

Credit cards, based on their types, come with offers and discounts. Based on the type of card, you can earn reward points, cashback, joining bonus, discounts, etc.

5. Fees and Charges

Credit cards come with a slew of fees and charges including joining fees, annual maintenance charge, cash advance fee, over-limit fee, late payment charges, etc.

6. Higher Interest on Cash Withdrawals

Credit card cash withdrawals call for higher interest rates. In fact, the interest rate charged could be higher than that of personal loan interest rates.

Credit Card Eligibility

Age: 18 – 70 years
Nationality: Indian resident and NRI
Income: Minimum income of ₹1 lakh (student credit cards and Government-backed cards don’t come with any minimum income requirement)
Credit Score: 600+

Documents Required to Get a Credit Card

Here’s a list of documents you might need while applying for a credit card:

Identity Proof – PAN or aadhaar
Address Proof – Driving licence, utility bills, voter ID, etc.
Pay Slips – Latest salary slips for salaried
Bank Statement – Last 6 months’ bank statements for self-employed

However, certain customers are pre-approved for credit cards based on their business relationship with the card issuer. For pre-approved credit cards, you don’t need to furnish any documents.

Fees and Charges of a Credit Card

Credit cards come with various charges and fees. As a user or potential user, you should be aware of all these charges. The various charges are:

Annual maintenance charge
GST
Over-limit fee
Late payment charges
Interest rate (APR)
Cash advance fee
Foreign Currency Mark-up Fee

How to Build Credit History with Credit Card?

Building credit history with a credit card can be a great way to establish your creditworthiness and improve your credit score. Here are some tips on how to do it:

1. Apply for a Credit Card

The first step is to apply for a credit card. If you have no credit history, you may need to start with a secured credit card, which requires a cash deposit that serves as collateral for your credit limit.

2. Use your Credit Card Responsibly

Once you have a credit card, it’s important to use it responsibly. Make small purchases that you can afford to pay off each month, and always pay your bill on time. Late payments can hurt your credit score and result in late fees and interest charges.

3. Keep your Credit Utilisation Ratio Low

Your credit utilisation is the amount of credit you’re using compared to your credit limit. Keeping your credit utilisation low can help improve your credit score. It is generally recommended to keep your balance below 30% of your credit limit.

4. Monitor your Credit Score

Monitor your credit score to understand how your credit habits are affecting your score. Make adjustments to your financial habits accordingly.

How to Get Credit Card Without Credit History?

You can avail a secured credit card against your fixed deposit account, a credit card against your savings account or a prepaid credit card if you wish to get a card without credit history. However, check with the concerned card issuer to understand the terms and conditions before applying for the card.

What is a Credit Card Annual Fee?

A credit card annual fee is an annual maintenance charge that is levied once a year. Some credit card issuers charge an annual fee as a way to offset the costs of providing the card and its benefits, such as rewards programs, travel benefits, or concierge services. However, some cards like lifetime-free credit cards don’t charge any annual fee.

How Does Credit Card Interest Work?

Credit card interest is the amount of money that you owe on your outstanding balance, calculated as a percentage of your balance. Here’s how credit card interest works:

Interest Rate: When you open a credit card account, you’ll be assigned an interest rate, also known as an APR (Annual Percentage Rate). This is the rate at which interest is charged on your balance.
Calculation of Interest: Credit card interest is calculated based on the average daily balance of your account over a billing cycle. To calculate the average daily balance, the issuer will add up your balance at the end of each day and divide it by the number of days in the billing cycle.
Compounding Interest: Credit card interest is typically compounded daily, which means that interest is added to your balance each day. This can cause your balance to grow quickly if you carry a balance from month to month.
Minimum Payment: Each month, you’ll receive a credit card bill that includes a minimum payment. If you don’t pay off your balance in full by the due date, you’ll be charged interest on the remaining balance. If you only make the minimum payment, it will take longer to pay off your balance and you’ll pay more in interest charges over time.

What are the Advantages & Disadvantages of a Credit Card?

Everyone uses credit cards in their day-to-day life. However, they have a few advantages and disadvantages as well. Let us read more about the benefits of credit cards and their disadvantages.

Benefits of a Credit Card

Major advantages of using a credit card include:

Easy access to credit: One of the major reasons to own a credit card is to get easy access to credit. These cards work on a deferred payment basis, which means the user uses the money during the purchase and then pays it back later. Also, it is not linked to your bank account, so money does not go out from one’s account each time one swipes.
EMI facility: If you want to purchase something expensive today, like a refrigerator or smart television, credit cards will be extremely beneficial. You purchase the item immediately with the credit card and then pay back in instalments. This way, you will not make any dent in your savings.
Building credit score: Having a good credit score is essential, especially if you want to take a loan from a bank. When you use your credit card for purchases and then repay the money spent, your credit score increases, it shows that you pay back debts on time and have the income to pay them back.
Record of expenses: Keeping track of expenses is a major feature and benefit of owning a credit card. A credit card issuer keeps track of all the transactions you made using the card. This way, they can prepare the repayment bill before the due date. Moreover, it will also give you an idea of where and when you had spent the money.
Purchase protection: If you are afraid of online transactions, use a credit card instead of a debit card. If you use a credit card and something goes wrong, like stolen or damaged goods sent to you, you claim the damages faster. Further, if you find the purchase website fraudulent, you can ask them to ask the bank to cancel or block the transaction immediately.
Incentives and Offers: Financial institutions design these credit cards to offer maximum benefits and incentives to their clients. These come in the form of redeemable reward points and gift vouchers or memberships to premium facilities.
Flexible credit: Credit cards are accompanied with an interest-free period. During this period, the cardholder is charged with any interest. This period ranges from 45-60 days, and cardholders can opt for a short-term credit if they have paid their balance on time.

Disadvantages of a Credit Card

Now that we know about the advantages of credit cards, let us learn about their disadvantages.

Easy to overuse: The biggest con of using a credit card is that one can overuse it easily. Since you don’t have to pay the charges immediately and see no instant effect on your savings, you might use the card on unnecessary things. This will most definitely lead you to incur a debt.
High-interest rate: If a cardholder fails to pay the dues on time, the bank will carry the amount to the next month, which will charge an interest rate. Moreover, credit card interest rates tend to be high. They start from 3% and can go up to 36% per annum.
Hidden cost: Credit cards have many hidden charges like joining, annual, processing, late payment, etc. Therefore, you need to know all the charges before applying for a credit card.
Minimum due trap: When credit cardholders receive the bill, they see a minimum due statement. Most people think that it is the amount they have to pay back to the bank. However, it is the least amount they are expecting you to pay back. Therefore, if one wants to keep on receiving credit facilities, they need to pay more than the minimum due.
Credit card fraud: In today’s era, many people have fallen prey to credit card fraud. People can easily clone the information on one’s credit card while the cardholder makes an online transaction.

What is the Minimum Payment on a Credit Card?

When you receive the credit card bill during each billing cycle, you will notice a minimum due or minimum payment statement. This is the minimum amount that the credit card company expects you to pay. However, you need to pay more than that amount to keep benefiting from the credit card facilities. Further, the excess amount depends from bank to bank and on the billing period.

Do’s and Don’ts of Credit Card

If you follow certain do’s and don’ts of a credit card, you can use it without incurring any debt.

Do’s

Be aware of your due dates
Check your monthly statements
Pay more than the minimum dues every time
Contact creditors to negotiate APR
Keep your payments around 10% of your income

Don’ts

You should not use the full credit amount
Never use reward credit cards if you have trouble paying off debts quickly
Do not use credit as a substitute for income
Never miss payments more than the grace period
Don’t carry a balance from one month to another

Final Word

Owning a credit card can be a great tool for credit building. However, you should use it wisely because you might have massive debts if you overspend. You should also read all the terms and conditions presented by the financial institution before you apply for the card.

FAQs

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

When you use debit cards for purchases, the money is deducted from your bank account. However, if you use credit cards for a transaction, you buy against credit which you will have to repay later.

What are the documents required to apply for credit cards?

Applicants require the following documents to apply for a credit card:
– Identity proof- Aadhaar card, PAN card, etc.
– Address proof- Utility bill
– Income proof- Last 3 months’ salary slip
– Passport size photographs

Is the credit limit monthly?

When you make the credit bill payments, the amount gets credited to your credit account, and the credit limit is reimbursed. Moreover, repayment of credit bills depends on the billing cycle, so your credit limit will also be monthly if you pay bills monthly.

Can I withdraw cash from an ATM with a credit card?

Yes, you can withdraw cash from any ATM. However, these would attract a certain amount of charge that you need to pay in your next bill cycle. Hence it is advisable to know the associated fees and charges to avail this benefit.

Can I apply for an additional card?

Yes, you can reach out to your lender and submit a request for an additional card. These add-on cards are issued against the primary credit card. Please note, there could be additional charges that might be levied when you opt for an add-on card depending upon the lender.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.

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Navi Team

We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.