Get Even More Visitors To Your Blog, Upgrade To A Business Listing >>

How Do Credit Cards Work? All You Need To Know

We all must have heard of a Credit card long before we ever used them. Moreover, our email boxes are bombarded with enticing credit cards that offer rewards on travel, shopping, and others. But have you ever wondered how do credit cards work? In here, know everything about a credit card and how it functions.

What is a credit card?

A credit card is a plastic card that lets you purchase goods and services on credit. With a credit card, you can simply purchase anything without paying anything to the vendor at that time. By the end of the month or as per your credit card cycle, you are given a due date to repay the amount.

For instance, you make a purchase of ₹10000 with your credit card. It is not deducted from any of your bank account balance but is just like a small loan taken by you from the credit card issuer. By the end of the credit card cycle, you are supposed to repay the same ₹10000. If you do it before your due date, you are not liable to pay any interest cost.

A credit card comes with your credit limit. The limit depends on factors such as your monthly income, employment type, credit score, and more. You are allowed to make purchases up to the credit limit offered to you. Adding to the above example, let us say you have a limit of ₹1 lakh on your credit card. This means you can make purchases of up to ₹1 lakh with your card.

However, after making a purchase of ₹10,000, your credit limit will get reduced to ₹90,000. If you make another purchase then your limit is further reduced. By the end of the month, if you pay back the outstanding, your credit limit will be renewed to ₹1 lakh. If by chance, you are unable to make the payments before your due date, you can either convert your spends into EMI’s or pay the minimum due. This is explained in the next section given below.

Credit Card and EMIs

Let’s say you made purchases of ₹30,000 and are unable to repay it in full before the due date, you have two options. You can either convert it into EMI or pay the minimum amount due. In both the cases, interest is charged as per the credit card agreement. Another important factor to understand is that you can only convert the amount into EMIs before your credit card statement is generated. Thereafter, you must either pay the amount in full or pay the minimum amount due to avoid any effect on your credit score.

Difference between Debit and Credit Card

Now that you know what a credit card is, it is normal to wonder the exact difference between your debit and credit card. Unlike a credit card, a debit card is also a plastic card that gives you access to your bank account. In simple terms, your debit card is a pathway to use your bank account and withdraw cash when required. However, you must have a balance in your bank account to use a debit card.

The following table will give you a clear understanding of the difference between debit and credit cards:

Parameters

Debit Cards

Credit Cards

Meaning

A plastic card that lets you access your bank account

A plastic card that lets you make purchases on credit

Bank Balance

Required

Not required

Credit Checks

Not required

Required

Ease of Getting

Very Easy

Only if you meet the eligibility criteria

How Does Credit Card Interest Work

The credit card issuer gives you a certain amount of time to repay the time which generally ranges between 25-30 days. This is known as the grace period. If you repay the amount within this time, you will not be charged interest and if you make the payment after the date, you will be charged a late penalty fee along with the interest. The interest is calculated on the basis of APR(Annual Percentage Rate) decided by the credit card provider.

One of the reasons why credit cards are considered evil is because of the sky-high interest rates bestowed on the customers. The APR of a credit card can vary from 12% to 36% depending on the credit card provider. However, with such interest rates, if you don’t make the payments in full, you might end up paying way more than you owed.

But here is the way out: when you make the payments in full each month, you can avoid paying any interest. That is the best part of a credit card! You can take full advantage of your credit card if you are able to make the payments in full and before the due date.


Related Article: Learn The Secret to Never Paying Interest On Credit Cards


Credit Card Fees That You Must Know

Now that you how and when credit card interest is charged, here are a few credit card fees you must look out for:


Late penalty

A late penalty is levied when you don’t make payments on time. You can avoid this if you pay the minimum amount due.

Annual Fees

Some credit cards charge a fee as annual fees for the benefits offered to you. However, if you are a responsible customer who makes his/her payments on time, this charge can be negotiated. In fact, there are some credit card providers who offer no-annual free credit cards.

Balance Transfer Fees

The credit card interest rate varies from lender to lender. So, if you apply for a balance transfer from another credit card, there is a fee that is charged as the balance transfer fee to process the request.


Related Article: Credit Card Balance Transfer | Best 5 Balance Transfer Cards in India


Cash Advance Fees

There is a facility to withdraw cash from your credit card. However, this incurs a cash advance fee which can be hefty. It is best to never use your credit card for cash advances unless during emergency situations.

Foreign Transaction Fees

There is a foreign transaction fee that is levied when you make purchases in a different currency unless your credit card is globally accepted. Therefore, if you make frequently makes international visits, it is recommended to look for credit cards without foreign transaction fees.

So, is a credit card a good idea?

If you are someone who can use your credit card responsibly, a credit card can be your best ally. They offer more rewards in comparison to debit cards and have a lot of benefits associated with them. Some of the common benefits offered by a credit card are:

→ An easy way to build credit

→ Earn rewards including vouchers, discounts, etc.

→ Provide shopping benefits

→ Lesser worry about frauds when compared to debit cards


Related Article: Tips and Tricks To Make the Most of Your Credit Card


A credit card can be a great financial tool if used properly. What’s better than making purchases now and paying off later?


Previous Article: How To Establish Financial Stability In Your Marriage


IndiaLends is a digital lending and borrowing marketplace that helps you connect with the best lenders based on your credit profile. We provide personalized personal loan offers, best credit cards, and free credit reports.

Explore IndiaLends

                                                                         

The post How Do Credit Cards Work? All You Need To Know appeared first on IndiaLends Blog.



This post first appeared on IndiaLends Blogs, please read the originial post: here

Share the post

How Do Credit Cards Work? All You Need To Know

×

Subscribe to Indialends Blogs

Get updates delivered right to your inbox!

Thank you for your subscription

×