Around 111 million active credit cards are present in India. Around 38 million are the new users. This shows the growth of credit cards in India. It is used in daily transactions for various purposes, both online and offline. It helps you get loans for payment whenever you need instant money. After that, you can pay back the money to the issuer. Here in this blog, we will learn what a credit card is, how credit cards work, and their advantages.
What is a credit card?
A Credit Card is a physical card that allows you to borrow money from the issuing bank. You can use this card to make a purchase. However, you need to repay the money to the bank. In simple words, it is like a debt with a flexible payment option. A person takes advantage of this credit for instant funds in case or emergency.
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How do Credit Cards Work?
As we had discussed earlier, a credit card can be used for both online and offline transactions. Here is the process:
- When you make a purchase, you can either swipe, tap, or enter your credit card details online.
- The store or website sends a payment request to the card network and issuing bank to verify whether:
- The card is active
- Enough Credit limit is available
- The transaction is secure
- Once approved, the card issuer transfers the payment to the merchant. The transaction amount is then added to your credit card balance.
- At the end of the billing cycle, the bank generates a statement showing your total spending, minimum due amount, and payment due date. You can either:
- Pay the full amount to avoid interest.
- Pay the minimum due to carry the remaining balance forward, with interest charges.
What is the term you must know about Credit Cards?
These are the terms you must know before applying and making a purchase:
- Credit Limit: Credit Limits are the maximum amount a Cardholder can borrow or spend. If a user spends more than this limit, the bank may charge extra fees.
- Interest Rate (APR): This is the extra money the bank charges if you do not pay the full credit bill on time.
- Billing Cycle: 30 days is the fixed period in which all your credit card purchases are recorded in one bill.
- Payment Due Date: It is the last day to pay your credit card bill. If you miss this date, late charges will be applied.
- Minimum Amount Due: The minimum payment you must make to avoid penalties.
What are the benefits of Credit Cards?
It offers various benefits to the user:
- Easy and Cashless Payments: Credit Cards make online and offline transactions quick, secure, and convenient without carrying cash.
- Rewards and Cashback: Many credit card companies offer reward points, cashback, travel miles, discounts, and shopping benefits.
- EMI Options: Large purchases can be converted into easy monthly installments (EMIs). It makes repayment more manageable.
- Credit Score: If you use a credit card responsibly and repay on time, it improves your credit score and history.
- Fraud Protection: Most credit cards provide security features like transaction alerts, fraud monitoring, and chargeback against unauthorized transactions.
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What is the Document Required and eligibility to apply for Credit Cards?
You need to complete the following criteria:
Eligibility Criteria for Credit Cards
Age Requirement: Between 18 to 65 years
Employment Status
- Salaried employees
- Self employed
- Business owners
- Students
- NRIs
Minimum Income
- Banks generally require a stable income source
- Salaried applicants need a regular monthly income
- Self-employed applicants need stable business income and ITR records
Credit Score
- A credit score of 700 - 750+ improves approval chances
- Higher scores may help get better rewards and limits
Documents Required for Credit Card Application
- Identity Proof
- Address Proof
- Income Proof
- ITR of the last 2 to 3 years
Tips to Use Credit Cards Responsibly
These buy-now-pay-later cards are useful if you use them smartly. Here is how:
- Pay Your Full Balance on Time: You should pay your bills on time before the due date. This habit avoids extra interest and late fees.
- Spend within your budget: Treat your credit card like cash and only spend what you can comfortably repay each month.
- Use Credit Wisely: According to financial experts, you should use only 30% of the credit to avoid using too much of the available credit limit.
- Avoid Impulse Purchases: Credit cards make it easy for people to spend easily but unnecessary spending will accumulate debt.
- Read Terms and Fees Carefully: You should check APR, annual fees, late payment charges, and reward conditions before using the card.
Conclusion
Credit Cards so useful for people, especially in case of emergencies, if they need instant funds. It allows people to buy things or pay bills with the EMI facility. To understand how it works, you can read the above steps for how credit cards work. It helps you know how you can easily pay with a simple swipe and use your credit card PIN. After that, you can easily pay to the credit card issuer either in one payment or EMI according to your convenience.
FAQs
How do Credit Cards Work?
The credit cards allow you to borrow money from the issuing bank up to a fixed credit limit. You can buy with a credit card and repay the money.
How do Credit Card Reward Points work?
Users can use these points for eligible purchases like cashback, travel, shopping, or other benefits.
What is a credit limit?
A credit limit is the maximum amount you can spend or borrow using your credit card.
What is the billing cycle for credit cards?
A billing cycle is a fixed period, which is around 30 days.
What documents are required to apply for a credit card?
You need the following documents:
- Identify Proof
- Address Proof
- Income Proof
- Bank Statement or ITR documents