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How Does a Credit Card Work?
Posted on Monday, March 7th, 2022 | By IndusInd Bank
Also referred to as plastic money or just plastic, credit cards are an easy and convenient way to make payments and build credit. Today, they are universally accepted, having more or less become an indispensable part of a modern lifestyle.
While most of us broadly know what a credit card is, many aspects of its usage remain shrouded in confusion and mystery, leading many to believe that a credit card does more harm than good. Here’s everything you need to know about credit cards, from how they work to how you can deploy them to your advantage.
What is a Credit Card & How Does It Work?
A credit card is a type of payment card issued by a bank or financial services company in which cashless transactions are made against a line of credit. Akin to a short term loan or advance, a credit card enables you to make purchases using the credit card issuer’s money. This is why every card comes with a set credit limit i.e. the total amount of credit that the bank is willing to lend you. If you try to exceed this upper limit, your transaction may be rejected by the credit card issuer.
Every month, you will get a statement from your bank giving you a list of all the purchases you made along with the total amount you need to pay, the minimum amount due, and date by which you need to pay. If you pay your credit card bill on time and in full without carrying any balance forward into the next billing cycle, you are not charged any interest.
Fees & Charges
There are several fees and charges associated with a credit card. To begin with, there is an annual maintenance fee. If you pay your credit card bill late, late payment charges are levied. Withdrawing cash from an ATM using your credit card typically attracts a steep fee. Additionally, using a credit card on your travels abroad can be rather expensive as foreign transactions usually involve a foreign currency mark-up fee which is charged as a fixed percentage of the transaction amount.
Benefits of Having a Credit Card
Credit cards offer a variety of benefits. The most important ones are as follows:
- Credit cards are convenient, easy to carry, and safer than cash.
- Credit cards unlock a wealth of freebies including discounts, cashback, air miles, and reward points that enable you to spend and save at the same time.
- A credit card, used wisely, can have a positive impact on your credit report. All you have to do is pay your credit card balance on time and in full every month and maintain a credit utilization ratio – the amount of credit you have used divided by the credit you have been extended by the credit card issuer – below 30%.
- While a credit card offers you a measure of financial flexibility and freedom to enjoy life, it also teaches you financial discipline, and how to plan and manage your funds better.
If you are planning to apply for a credit card online, being aware of the aforementioned facts can help you make an informed decision regarding whether or not you’d like a credit card, and if yes, then which one. Just make sure to do your research and opt for a credit card that addresses your particular lifestyle needs.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
