How credit card works?

Credit card is a physical card with electronic chip embedded helps in making purchases, paying bills online without having money in your bank account. It is basically a loan taken from the bank. Every credit card has something called credit limit. All the spending made in the credit will sent to merchant bank and on authorization of the merchant bank will approve or reject the transaction. Since every transaction is automated, payments will get authorized when it follows the credit limits.

Credit limit is the maximum amount that can be spent by a person based on their credit score and credit history. The money spent using credit card can be re-paid to the bank without any interest rate or penalty when a user pays back the amount with-in the grace period. Monthly usage statement will be sent to the users and banks will provide the grace period of 18-30 days based on the plan chosen.

Payment made using credit card will be rewarded with points, miles or cash back and it can be further used for future purchases. Credit card will also provide many promotional offers for the users to buy products with better discounts.

Usage of credit cards and re-payment will increase the credit scores of the users, which helps the users to get more loans in the future at better rate of interest. Better credit scores can help you in getting the Home/Motor/Education loans with better interest rate and eligibility for more credit.

Myths of Credit card:

  • Usage of credit card will always lead to bigger problems.
  • Credit card will always lead to bigger problems.
  • Holding more than one credit card leads to bad credit scores
  • Annual fee will be always charged directly or in-directly
  • It is enough to pay only minimum due amount.
  • Monthly payment should be paid as soon as possible

Issue of Credit card:

Credit card issuance is a competitive space and referral will be provided if some refers to sell a credit card. Credit card will be issued based on the user’s credit history and the spending habit of a person. Basic credit card plan will be available even for people with no banking transaction. Anyone can get the credit card unless they have really poor credit history.

There are couple of major parameters will be changed for every person while getting credit card.

  1. Credit Limit: This depends from person to person. Generally limit of credit limit will be their 3-6 month salary. Every bank has their own way of calculating the same. Some bank can calculate based on the spending and other transaction. There is no one thumb rule for credit limit.
  2. Rate of Interest: Person with better credit score can get better rate of interest.

Every credit card has its plan. Some credit card have more credit limit, some have more grace periods, some of them can have less interest rate, some may have less annual fees.

You can chose credit card based on your requirement. It is not always bad to pay annual fee for credit card, because these credit card plans can have more rewards.

Sometimes credit card limit will be increased based on your income or increase of credit scores.

Terminology to know before buying the credit card:

Annual Fee: A fee levied to use a credit card. Not all credit card plan has annual fee.

Annual Interest Rate: Rate of interest charged after Interest-free period on your spending. It ranges from 18-36% annually.

Grace Period: It is a time between creation of monthly statement and payment due date. During this period, no interest rate will be levied. This will be from 15-30 days has per the credit card plan.

Interest-Free Period: It is a period given to the user to payback the spent amount without interest rate. It can be from 20-45 days based on your statement date of credit card.

Minimum Payment: It is the minimum payment that should be paid to avoid the penalty. User still have to pay the Interest on spending but can avoid the penalty.

Penalty Interest Rate: When user skips to pay even minimum payment of the credit card, penalty will be levied. This ranges from 2-4% of the spend amount additional to interest rate.

Reward Program: This is the promotional offer of credit card, it rewards the user to spend more on its offer. The reward will be paid as points, cashback. This will be a marketing tool for credit card companies to attract customers.

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