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What is a credit card – basics you must know?

New to credit cards? Here we share with you some basics on credit cards to help make you a better user of these instruments.

What is a credit card?

A credit card is a card whereby you the user can get credit to pay for goods and services up to a certain pre-determined monthly limit. At the end of the month you are expected to pay the amount you spent on the card back to the credit card issuer. If you delay your payment or cannot pay back in full, certain penalties or interest will be charged.

Basically, spending on a credit card is like taking a loan from the card issuer, on the contractual condition that you will pay back your outstanding credit (i.e., the amount you have spent using your card) at the end of every billing statement which is typically every month.

Credit cards are an expensive source of getting credit (i.e., taking a loan), but can be very convenient to use because your spending limit is pre-approved up to a certain minimum limit. Once your card is active, you can spend up to your prescribed limit on any kind of expense, without any restrictions on whether that type of expense is approved or not. So, whether its buying petrol, eating at a restaurant, or any kind of e-commerce transaction, you have the freedom to spend up to your credit limit.

While this spending freedom can be very convenient, its your obligation to pay back the credit you have used on the card when you get your statement.

Who issues a credit card? Who is eligible to receive a credit card?

Credit cards can be offered by banks or institutions authorized to issue cards. Every credit card is a part of a payment network such as Visa, MasterCard or Diners Club and the like.

For instance, HDFC Bank might have been the issuer of your credit card, but the card belongs to the Visa payment network that facilitates your payments to the providers of the goods and services that you choose to buy. Or, Indian Airlines might be the issuer and the card belongs to the American Express network.

Every issuer has their own criteria for eligibility. At a minimum you have to be at least 18 years of age. Issuers will need to see that you have a constant source of income, so that they get the security that you have the ability to pay back the credit that you are incurring on your card.

The amount of the credit limit offered to you will be dependent upon your income and the issuer’s view of your repayment capacity.

What is the interest rate charged on a credit card?

Like discussed above, spending on a credit card is like taking a loan. The monthly interest rate charged on your total outstanding amount is typically between 3% to 5%. On an annualised basis, this works out to be as high as 36% - 45%, or even higher in some cases.

As you can see, it is a very expensive form of taking a loan. A personal loan, for instance, can be available for 18%-20%. Therefore, its best to spend on a credit card only when you are confident that you will be able to pay your outstanding dues on time and in full.

What are the types of credit card available?

Recently there have been innovations around the type of credit cards that are available depending upon the type of customer, as well as the purpose that the card is being used for. Also, some cards charge an annual fee which depends upon the type of services and features that the card offers you. As you build your history of using the card and cross certain spending thresholds, you might become eligible for a premium or luxury status on the card, which in turn entitles you to more benefits and perks.

Below is a brief summary of the types of cards that exist so give you a feel for the range of options that you might be eligible for or that might be suitable for you.

1. Regular card: Almost every bank has entry level cards that come with the most basic feature of offering customers a monthly credit limit. Usually, these cards don’t charge an annual fee. Once you have built a spending history and trust with the issuer, you might then be eligible for a fancier card or more benefits by upgrading your card to the next level.


2. Premium card: Premium cards, such as gold and platinum status, are offered by issuers to their best and most credit worthy clients. Such cards offer a higher credit limit, and additional services like exclusive travel and preferential benefits. Each time you spend on the card, you might also be eligible to accrue loyalty points that you can redeem against goods and services offered by partners of your card issuer. Some issuers might even charge an annual fee to their client for these cards.


3. Secured credit card: As the name suggests, these types of cards are offered when the customer makes a security deposit with the card issuer up to a percentage of the total amount of the credit limit needed. The repayments for the card are made monthly like any other card. However, in case a customer defaults the issuer can recover its losses from the security deposit made. This type of card is suitable for customers who are not sure of their repaying capacity on the card.


4. Corporate credit card: Employees at companies often have to make payments on the company’s behalf – for instance, travel tickets, hotel rooms, meals, car rentals etc. Corporate cards are issued on the back of the creditworthiness of the company, but allow individual employees to spend on the card.


5. Women’s credit card: Some issuers offer special credit card deals and terms to women customers. These could include cheaper borrowing rates, or special privileges and reward points.


6. Airline credit card: Such cards are issued by airlines, in partnership with a bank or a card network. They can offer special features like receiving loyalty points on every rupee spent on the card. These points can then be converted into air miles, which can then be redeemed for travel tickets on the airlines. Some cards also have partnerships with hotel and other travel partners to offer loyal clients benefits at other travel related establishments.

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