Credit Cards: Types, Features, Benefits And Fees Explained

Credit Card

Individuals can apply for a credit card to pay the merchant for goods and services against a line of credit instead of paying from their cash deposits. Moreover, owning a credit card allows one to manage one’s finances during a cash crisis. It allows great freedom to cardholders and has a lot of benefits only if they use it judiciously. 

Scroll down if you are new to credit cards and want to know more about them! 

What is a Credit Card?

A financial institution issues a credit card to its clients. This card allows them to borrow funds to pay for goods and products. Later, they need to pay back the dues on time to avoid penalties and decrease their credit score. The credit card is also not linked to the cardholder’s bank account, so you can rest assured that the money is not getting credited from your account immediately. 

However, each credit card has a credit limit, and the card issuer determines these limits. The determining factors include one’s income, credit score and credit history. Further, they consist of the card number, cardholder’s name, expiry date, CVV and cardholder’s name. Credit cards were introduced to make transactions cashless and smooth for users.

What are the Different Types of Credit Cards?

There are 10 different types of credit cards that you can apply for at a financial institution. These are:

• Rewards credit cards
• Travel credit cards
• Cash back credit cards
• Balance transfer credit card
• 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

Also Read: 10 Best Credit Cards For Online Shopping

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. Gifts and offers: Whenever an individual applies for a credit card, the card issuer offers many gifts like sign-up bonuses, etc. In addition, some cards come with reward point systems and gift vouchers. 
5. Regular charges: Financial institution that issues the card charges some nominal fees from the users. These charges can be annual and additional. They are only charged if their credit card has certain add-on features or benefits in case of additional charges. These charges also include the government-imposed service tax. 
6. Higher fees on cash withdrawals: Many people believe that they cannot withdraw money with a credit card. You can withdraw money from ATMs if you need to; however, you will have to pay higher fees during your due date. 
7. Grace period and additional payments: Every credit card offers a grace period to its users. Still, if one fails to pay the dues even after the grace period, one has to pay additional charges. These additional payments are usually termed late fees. 

Fees and Features 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

Also Read: 7 Benefits Of Using A Credit Card: Pay And Get Rewarded!

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. 

Advantages

Major advantages of using a credit card include:

1. 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. 
2. 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. 
3. 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.
4. 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. 
5. 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. 
6. 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. 
7. 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

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

1. 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. 
2. 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. 
3. 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. 
4. 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. 
5. 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. 

How Does a Credit Card Work?

You can use credit cards to make online or in-store purchases. The card’s details are sent to the merchant’s bank during this transaction. The merchant’s bank then gets authorization from the card’s payment network. Then the financial institution that has issued the card will have to verify the information and approve or decline the transaction. 

Once the payment is approved, the transaction amount will be deducted from the cardholder’s credit limit. The cardholder will have to pay the final amount when the credit card company sends the bill. Moreover, the bill payment must be within the due date or grace period. In case of failure to pay back dues in time, the user is levied with an interest rate. 

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 on Credit Cards

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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.