What is Credit Cards?
A credit card is a convenient tool that allows you to buy items now and pay for them later. If you buy something with credit, you are in debt. This means that you owe money to the company that gave you the credit card. If you don’t pay the entire amount at the end of each month, you pay a fee for the credit card called interest. If managed correctly, credit cards can be a great way to build credit and manage your money.
Table of Contents
Sometimes people confuse credit cards with debit cards or prepaid cards. Here’s the difference:
- CREDIT CARD: You borrow money from a credit card issuer and you pay later (with interest, if you do not pay the balance in full and on time).
- DEBIT CARD: Your own money is taken directly from your checking account to make the payment. It acts like a check, but it’s faster and more convenient.
- PREPAID CARD: You can put your own money onto a card to make purchases. It works like a gift card.
Features of Credit Card
Following are the features of credit card:
Interest Rate
Interest rate is the prime feature of any credit card. Interest rate is directly influencing the payment for borrowing money on the credit card. In general, the interest rate is expressed as the annual percentage rate (APR).
Grace Period
The card issuers may provide a grace period to pay off the balance. The grace period is the amount of time given to the cardholder for the payment of his credit card balance in full to avoid interest charges. Credit card grace periods range is subject to the conditions of the card issuers.
Fees
Annual fee is normally charged by the card issuer. Over-limit fee is charged on the amount exceeding the credit limit of the cardholder. Cash advance fee is charged when the cardholder makes a cash advance on his credit card. Balance transfer fees are added when a cardholder transfers a balance to his credit card.
Credit Limits
Credit limit is the maximum spending amount of the cardholder by using his card. The cardholder may exceed his credit limit if he has opted ‘over-the-limit’ option. He is charged with the fee for over-the-limit when a transaction goes over the credit limit.
Debit Cards Vs Credit Cards
| Debit card | Credit card |
|---|---|
| The spending power depends on the drawing capacity which in the case of Debit Card is your own assets with the bank. | It allows a borrowing power on the bank, for which you have to pay some charge or fees. |
| Debit card is as good as money in the accounts with the bank | Credit card has the additional advantage of your overdrawing if necessary, payments are made by the bank to the extent of the purchases and if they exceed the limit, Interest has to be paid to the excess amount spend. |
| There is no risk of overspending, and it does not involve interest payment | Borrowing is possible and interest to be paid on the overdrawn amount. |
Both Credit Cards and Debit cards complement each other and are precursors to the electronic card which consolidates all the cash account in various branches of a bank, connected through the Bank Internet and allows managing the payments most economically in tune with the receipts and promotes efficient cash management.
Advantages of Credit Card
Advantages of credit card are:
- Instant Cash
- Convenience
- Purchase Power and Ease of Purchase
- Protection of Purchases
- Create a Good Credit Worthiness
- Emergencies
- Credit Card Benefits
Instant Cash
Credit card holders can get cash instantly whenever and wherever they need.
Convenience
Credit cards are convenient and time saving for cardholders from searching for an ATM or keeping cash on-hand.
Purchase Power and Ease of Purchase
The purchasing power of the credit card holder can increase due to allowing credit purchase by using credit cards. It makes easier to buy things. There is no need to carry bulk amount of cash with the card holder for purchase of goods. It is very useful and easy for e-ticket booking (Train, Air, bus, hotels, Theater, pilgrim dharsan etc.).
Protection of Purchases
The credit card statement can be a voucher for the purchase when the original receipt is lost. Some credit card company may offer insurance coverage on large purchases.
Create a Good Credit Worthiness
The credit worthiness of the cardholders is proved through making prompt payment. The creation of good credit worthiness is useful to the cardholder in certain circumstances like applying for loans, jobs etc.
Emergencies
Credit card helps to make some emergency payment for certain dues like motor vehicle installment due, rent, Hospital bill etc., and also it will be very helpful in emergency situations like car breaking down, flood, fire etc.
Credit Card Benefits
Credit cards offer some additional benefits like discounts from particular stores or companies, bonus such as free airline miles or travel discounts, and special insurances (like travel or life insurance.).
Disadvantages of Credit Card
Disadvantages of credit card are:
High Interest Rates
Charging high cost of loan is the biggest drawback of credit cards. The interest rate for purchase, balance transfer, cash advance etc. is very high. These interest rates make the actual cost of any purchase higher because of the higher interest rate component. Getting money is easier by using credit card with high rate of interest.
Lavish Spending
Normally, the human tendency is to spend lavishly when they have more liquid cash. Credit cardholders are easily influenced to spend more money through some offers like lucrative discounts, cash back etc. which drive cardholders to increase their debt.
Heavy Penalty
Issuers of credit cards are charging heavy penalty for late payments made by the card holders. The issuer can take very serious action against the cardholders for default in repayment of debt with penalty.
Major India Credit Card Types
Following are various types of credit cards available in India:
- Premium Credit Cards
- Cash Back Credit Cards
- Gold Credit Cards
- Airline Credit Cards
- Silver Credit Cards
- Business Credit Cards
- Balance Transfer Credit Cards
- Co-branded Credit Cards
- Low Interest Credit Cards
- Lifetime Free Credit Cards
- Rewards
There are some additional credit cards that are available in India as well. Rewards credit cards available in India can be subdivided into six categories – Points, Hotels and Travels, Retail, Auto and Fuel.
Read More Articles
