All About Credit Cards: The Complete Guide
The world of credit cards in India is getting more & more interesting with every passing day. Right from fintech companies getting millions of funding to almost every other finance company partnering with some bank to provide co-branded cards. The credit card game is just beginning in India!
So, in case you always wanted to know exactly everything about credit cards and their usage then you’ve landing on the right page. In this article, we’d cover all the basics around credit cards and their usage. So, let’s begin.
What Are Credit Cards & How Do They Work?
Credit cards simply make the process of making payments easier, this happens by replacing the usage of cash or money in your bank account (debit cards). Unlike debit cards or cash, whenever you use a credit card, you are not using the money that you currently possess, but instead, using money that a financial institution or a bank has lent to you, this amount of money that has been lent to you is also known as credit limit.
The idea is to pay using the credit limit you’ve been assigned throughout the month and then paying a single credit card bill at the end of the month with the money you possess.
Does Using Credit Cards Cost You Money?
The logic of credit cards works in a simple way. You have a single statement generation date every month; any money spent 30 days prior to your statement generation date is usually interest-free if you pay off the bill within the due date assigned by the bank for that statement. Generally, that window is 20 days.
So, for example, you spend 1Lac between 1st Jan to 31st January 2021, your statement then gets generated on 1st Feb 20201 with a due date of 20th Feb 2021 (for the purchases made during 1st to 31st Jan). In this scenario if you clear the bill before the due date then you would be paying 0 interest. However, if you do not clear the bill in time or clear the bill partially, then whatever the remainder of the amount is (that you haven’t cleared) will attract a high interest on an on-going basis.
Finally, if a transaction is converted into EMI or Equated Monthly Installments yourself then of course that particular transaction would have its own charges as per the payment plan being offered to you.
If There Are No Charges in The Interest-Free Period, How Do the Credit Card Providers Earn?
It’s simple, every merchant who accepts payments via credit cards pays a small percentage to the bank for the use of their services. This is the prime earning of the bank from your usage of a credit card, apart from this the bank has many more ways to earn from credit card usage in the form of co-branded cards, offering merchant exclusive discounts, and many more.
What Type of Credit Cards Exist In India?
Several types of credit cards exist and in fact, this aspect is also expanding with the entry of modern app-based credit-line applications in India presently.
The common types of credit cards are:
Travel credit cards: You get points that can be redeemed against travel tickets.
Cashback/Reward cards: You get points for every spend and they often have rewards tied to the amount of spending as well.
App-Based Credit Lines: These are the most modern types of credit cards that aren’t physical credit cards. In such app-based credit lines usually you are given the card details virtually (optional physical form is also offered at times) using which you may transact anywhere and track all the spending in the credit card provider’s application.
What Factors Are Taking into Consideration by The Credit Card Provider?
Various really, from your income status to various other data points like addresses you’ve used previously, your data on other credit cards or loans, etc. Every financial institution or bank has just one objective and that is to negate their risk factor as much as possible. They do so by evaluating all metrics and running their own formula on this data, and if you fall into the category of a low-risk customer or a responsible borrower to them, then the card is assigned to you and otherwise, your credit card application might be rejected.
Who Provides the Credit Cards? The Banks or Visa/Mastercard?
Visa & Mastercard are simply the payment processing companies and not the banks who are issuing you the credit card. Visa & Mastercard remain the most widely accepted payment processing companies worldwide.
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