Credit Cards
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- What is a Credit Card?
- How does it work?
- Why should I get a Credit Card?
- What are the different types of Credit Card?
- What are the things that need to be checked before applying for a credit card?
- What’s the difference between a secured and an unsecured credit card?
- What do the lenders look for?
- What are the charges that can be levied on a Credit Card for late payment?
- How is the interest rate calculated on Credit Card outstanding?
- Will making a few delayed or partial payments affect my CIBIL Score?
- How to choose the best credit card?
A Credit Card comes in the form of a plastic card (also called plastic money) issued by a bank or a lender allowing the user to make purchases on credit, up to a predefined credit limit. Credit limit is the maximum amount that can be spent or borrowed using the credit card. The limit varies for different borrowers and lenders as it is determined based on the borrower’s income, source of income, credit score, repayment history, and other personal details.
A credit card does not imply that your monthly earning has increased, it simply means that your borrowing or buying capacity has amplified. The purchases made on your credit card are actually money borrowed from the lender. Each month, you will get an itemized statement of your expenditure, which needs to be paid, on or before the due date to avoid interest charges.
Why should I get a Credit Card?
Having a credit card enables you to make purchases beyond your budget while allowing you to pay back a full/part of the amount on a monthly basis. It is a facility that lets you borrow money on short notice and repay it back in installments (if required). A credit card also offers other perks in the form of reward schemes and benefits; Miles are awarded if you spend a specific amount on airlines, reward points are awarded for spending a certain amount every month on shopping, etc. (This varies from card to card and lending institutions). These offers change from time to time but the accumulated points can later be redeemed for various other items depending on the credit card issuer's policy.
What are the different types of Credit Card?
Of late due to influx of various private banks, lenders and NBFCs into the Indian financial system there has been a rise in the types of credit card offered. The different types of credit cards available in the market are:
- Signature, Platinum, Gold or Silver: Lenders assign you from among these cards based your income, existing EMIs or any other financial liabilities.
- Miles Card: Meant for frequent flyers
- Fuel Card: Waiver’s the surcharge on fuel
- Lifestyle Cards: Premium cards aimed at fulfilling varying lifestyles, needs and expenditures
- Movie Card: Specially meant for movie enthusiasts having weekly or monthly offers
- Cashback Card: Some cards provide cashback on all spends along with reward points whereas some cards provide cashback on a few categories only
- Co-branded Card: Usually offered jointly by a bank and an associate company
The type of card offered is based on the consumer’s borrowing power (based on his income and credit history) and each card type provides different offers, schemes and reward points.
What are the things that need to be checked before applying for a credit card?
Credit Cards when used judiciously play a major role is simplifying our finances. Things to be checked before applying for any credit card are:
- Credit Card Limit: It is usually decided for you by the lender based on your income and employment background.
- Annual Fee: Always check whether your card comes with an annual fee or is a lifetime free card.
- Billing Cycle and Payment Methods: It is important to know the billing cycle and various payment method options, so that you can plan your expenses accordingly and have surplus money at the end of the month to make credit card bill payment on time.
- Late Fee or Interest: When finalizing the card do take note of late fee charges or interest levied on any missed or part payment of your credit card bill.
Click here and check your credit card eligibility and take informed decision before going for the credit card of your choice.
What’s the difference between a secured and an unsecured credit card?
A secured credit card is the one for which you first need to make a fixed deposit which the bank uses as collateral in case you default on your payment. A secured credit card is typically used by people who do not have a credit history or have bad credit.
All other types of credit cards are unsecured credit cards as you do not have any collateral attached to them.
It is best to check your CIBIL Score and Report first, so that you are not caught unawares and can apply for a credit card with confidence. Lenders check your CIBIL Score and Report to evaluate and approve your credit card application. Ensuring a high CIBIL Score, no repayment defaults and a good credit history increases your chance of getting a credit card of your choice.
What are the charges that can be levied on a Credit Card for late payment?
If you do not pay your monthly credit card payment at all then you will have to pay interest on the outstanding amount (which can be as high as 36%) along with late payment charges (which differ from lender to lender).
In case you do not pay the “Minimum Amount Due” by the due date, then late payment fees are levied along with the interest charge on your outstanding amount. This late payment fees ranges from Rs. 250-1000, depending on the financial institute and type of card. Also, non-payment by the due date negatively impacts your CIBIL Score, which in turn may affect your future borrowing and bargaining capacity.
How is the interest rate calculated on Credit Card outstanding?
If you pay only the minimum due or do not pay at all by the due date, then the interest rate as applicable will be levied on your outstanding. Most Credit Card issuers follow the average daily balance method. Assuming the payment is not made within the grace period or the interest-free period (often between 45-60days). This interest rate can be as high as 36% p.a. Let’s look at the below example -
| Date | Transaction details | Amount |
| 10 September | Purchased Gadget | 15000 |
| 15 September | Purchased Jewellery | 5000 |
| 18 September | Payment Due date | |
| 15 October | Payment mode | 2000 |
| 16 October | Fuel purchase | 1000 |
| 17 October | Payment made | 15000 |
*Since the individual paid post the due date, the entire outstanding balance will attract interest rate and a late payment penalty.
The charges calculated are as below -
Interest on 15000 @ 2.65%pm from 18 September to 15 October (i.e. for 28 days) ((15000 x 2.65 x 12 x 28)/365)/100 = 365.91
Interest on 13000 @ 2.65%pm from 15 October to 17 October (i.e. for 3 days) ((13000 x 2.65 x 12 x 3)/365)/100= 33.97
Interest on 5000 @ 2.65%pm from 18 September to 17 October (i.e. for 30 days) ((5000 x 2.65 x 12 x 30)/365)/100 = 130.68
Interest on 3000 @ 2.65%pm from 17 October to 18 October (i.e. for 2 days) ((3000 x 2.65 x 12 x 2)/365)/100 = 5.22
Interest on 1000 (fresh spends @ 2.65%pm from 16 October to 18 October (i.e. for 3 days) ((1000 x 2.65 x 12 x 3)/365)/100 = 2.61
Thus total interest = (365.91 + 33.97 + 130.68 +5.22 + 2.61) = 538.39
Will making a few delayed or partial payments affect my CIBIL Score?
With a credit card, always make payments on time because the late payment fees is very high, around 15% of minimum payment due or 2.5% of the total outstanding balance. Also, every delayed or partial payment directly impacts your CIBIL Score, making it difficult to secure another credit line. Another thing to watch out for is the closing of your credit card account; ensure the bank closes the account or else the charges will keep rising and it may be viewed as outstanding payment, which will affect your CIBIL Score and Report.
How to choose the best credit card?
Today an individual is spoilt for choices when it comes to choosing a credit card. Credit cards come in different types, with multiple features & benefits, and can also be finalized based on your lifestyle, buying and repaying capacity. The only way to choose the best credit card is to first understand your requirement, analyze your present liabilities and evaluate your repayment capacity. Do a thorough research on the features and benefits of each credit card, including security features in case of fraud or theft, the various fees, charges or interest rates.
Click here to check your credit score and get the best credit cards based on your latest CIBIL Score and Report.
Document Checklist
* This is an indicative list and may differ from lender to lender.