Credit Card 101: The Complete Guide for Beginners

Credit cards give you the freedom to buy what you need today and pay later. They also offer protection against fraud, allow you to earn rewards or cashback on purchases, and help you build a credit score. Knowing how a credit card works will help you choose the right card, save money, and avoid unnecessary charges.

So, let’s break it down together and explore credit cards in a way that makes sense.

Credit Card Basics

1. What is a Credit Card?

A credit card is a rectangular card made of plastic or metal that allows you to borrow money from the issuing bank. You can use this line of credit to pay for products and services.

To make a purchase:

• Swipe your credit card (if paying offline)
• Or enter your card number, CVV, and OTP (if paying online)

No money is immediately deducted from your bank account; your bank covers the cost, and you typically have 30-50 days to repay the amount. Each card has a monthly billing cycle.

You can also choose to convert your outstanding balance into EMIs and pay it over a longer term, but this will incur additional fees and interest charges, which are usually quite high. Some retailers offer No-Cost EMI options as well.

Example:

When you use your credit card at a coffee shop, your bank pays the shop. As you make other purchases throughout the month, these are added to your bill. At the end of the month (or on a chosen date), you receive a statement detailing your purchases, the minimum amount due, and the total outstanding balance.

You can then pay the total outstanding balance, or at least the minimum amount due, to avoid penalties. Paying only the minimum amount, however, will incur interest charges on the remaining balance, which can quickly accumulate and trap you in a debt cycle.

2. How Does a Credit Card Work?

You apply for a credit card (or the bank may pre-approve one for you) –> the bank checks your income, credit score, and/or existing relationship with them –> if approved, it issues you a credit card with a limit based on these factors.

You then pay for products or services using your credit card -> your bank pays the merchant -> your card bill is generated on the designated date -> you clear the bill.

Your payments are processed by payment networks – Visa, Mastercard, Discover, RuPay, JCB, and American Express (usually mentioned on the front or back of your credit card). These networks ensure that your money reaches the correct merchant.

3. How to Pay Your Credit Card Bill?

You can easily pay your credit card bill using various methods. The most convenient options are your bank’s mobile app or net banking, which allow quick payments online. Alternatively, you can pay by cheque or cash at a bank branch. If you have multiple cards, consider using third-party credit card bill payment apps to manage your payments more efficiently.

4. Credit Card vs. Debit Cards

A debit card is directly linked to your bank account. Every time you use it, the money is instantly debited from your account. You can only spend what you have available in your account.

In contrast, a credit card gives you a line of credit to borrow from the bank. You can make purchases even if you don’t have sufficient funds in your account, and you’ll repay the borrowed amount later when your bill is generated.

While some debit cards offer rewards, credit cards generally provide more lucrative offers and benefits, such as cashback, reward points, air miles, and discounts.

Moreover, credit cards offer better protection against fraud compared to debit cards. If you face unauthorized transactions or scams, you can dispute the charges and initiate a chargeback with your credit card company. Your chances of recovering your money are higher with credit cards.

Types of Credit Cards in India

There are different types of credit cards available in the market:

1. Cashback Credit Cards: These cards give you a percentage of your spending back as cash, directly credited to your account or statement.

Example – SBI Cashback, Standard Chartered Smart, Axis Bank Ace, Amazon ICICI Pay, Flipkart Axis, etc.

2. Rewards Credit Cards: These credit cards offer you reward points for every transaction you make. You can redeem these points for various rewards, such as merchandise, gift cards, or travel.

Some rewards cards also offer cashback as a redemption option.

Example – HDFC Regalia, SBI Card Prime, American Express Membership Rewards, etc.

3. Travel Credit Cards: You get points or airmiles which you can use for booking hotels or book flight tickets. These are generally meant for those who travel frequently.

You may also get other travel-related perks like airport lounge access, railway lounge access, travel insurance, and bonus points on travel-related expenses with these cards.

Example – Kotak Indigo 6E Rewards, Marriott Bonvoy HDFC, SBI Elite, Axis and SBI Vistara credit cards, etc.

4. Lifestyle Credit Cards: Lifestyle credit cards are meant for various lifestyle expenses, including shopping, dining, travel, and sometimes even fitness or wellness.

You’ll get discount at partner stores, cashback on certain categories, and access to exclusive programs or events.

Example – HDFC Regalia, SBI Elite, American Express Platinum, etc.

5. Entertainment and Food Credit Cards: These cards focus on entertainment and dining expenses, offering discounts on movie tickets, cashback on dining, or free subscriptions to streaming platforms.

Example – Axis Bank My Zone, Swiggy HDFC, Kotak PVR League, RBL Bank Fun+ credit card, etc.

6. Co-branded Credit Cards: A credit card offered jointly by a bank and another company (e.g., airline, hotel chain) that offers specific rewards or benefits related to that company.

Example – HDFC Tata Neu, ICICI Amazon Pay, Axis Flipkart, IRCTC SBI Platinum credit card, etc.

7. Student Credit Cards: A student credit card meant specifically for college students who are typically new to credit and may have limited income or credit history. They typically have lower credit limits and often require a fixed deposit as collateral.

If you’re a student, these can be a great way to start building your credit history. However, keep in mind that most banks in India require applicants to be at least 18-21 years old to be eligible for a credit card, including student cards.

Example – IDFC Wow, ICICI Coral, Kotak Dream Different credit card, etc.

Credit Card Terms You Should Know

Here are some key credit card terms you should know:

• Credit Limit: The maximum amount you can spend on your card.
• Billing Cycle: The period over which your transactions are recorded (usually monthly).
• Statement: A summary of your purchases, payments, and the total amount due.
• Minimum Payment: The smallest amount you must pay each month to avoid penalties.
• Interest: The fee charged on unpaid balances, usually expressed as an annual percentage rate (APR).
• Reward Points: Points earned for purchases, redeemable for various benefits.
• Fees: Charges for using the card, such as annual fees or late payment fees.
• Annual Percentage Rate (APR): The yearly interest rate you’ll be charged on unpaid balances (i.e., for times you cannot clear the balance and choose to carry it forward).
• Grace Period: Missed your due date? Don’t worry. Banks generally give you a grace period of 3 days. No interest is charged during this period.
• Cash Advance: This is when you use your credit card to withdraw cash from an ATM. It typically has higher interest rates and fees than regular purchases. Most banks also charge a cash withdrawal fee. It’s generally not recommended unless absolutely necessary.
• Balance Transfer: This allows you to transfer your outstanding balance from one credit card to another, often with a lower interest rate for a promotional period.
• Credit Utilization Ratio: This is the percentage of your available credit that you’re using. Keeping it low (below 30%) is generally recommended for a healthy credit score.

Tips for Using Credit Cards Responsibly

Credit cards offer you the convenience of making purchases and managing your short-term expenses like food, grocery, bill payments, and shopping, but it’s crucial to use them responsibly.

By understanding your card’s features, fees, and interest rates, you can avoid unnecessary charges and build a good credit history.

• Choose the Right Card: Consider your income and spending habits. Look for cards with rewards that match with your lifestyle (e.g., travel, fuel, groceries).
• Pay Your Bill in Full: Always try to pay your credit card bill in full and on time to avoid interest charges and maintain a good credit score.
• Use Rewards: Take advantage of reward programs to maximize your benefits, but don’t overspend just to collect points.
• Check Your Statements: Regularly review your statements to track your spending and identify any hidden charges or unauthorized transactions.
• Avoid Cash Advances: Cash advances come with high fees and interest rates. Use them only as a last resort.
• Fuel Surcharge Waiver: Many Indian credit cards offer fuel surcharge waivers, but these often have minimum transaction limits and may be capped monthly.
• Beware of Hidden Fees: Read the fine print to understand all the fees associated with your card, such as late payment fees, over-limit fees, and foreign transaction fees. Some cards are marketed as “lifetime free” but may require you to meet a minimum spending criterion to waive the annual fee.
• Build Your Credit Score: Use your credit card responsibly and pay your bills on time to build a good credit history, which will help you get loans (and at cheaper rates) in the future.
• Turn Off International Transactions: If you don’t frequently make purchases on international websites, consider disabling international transactions on your credit card. Many international transactions don’t require an OTP, and this can lead to frauds if someone gets a hold of your card details.

Before You Apply for a Credit Card

If you’re considering getting a credit card, carefully evaluate your needs and goals. Ask yourself:

• Why do I need a credit card? Am I attracted to specific bank offers, cashback rewards, or features like lounge access?
• What’s my credit score? Knowing your credit score will help you understand what kind of cards you’re eligible for.
• What are the fees? Are there joining or annual fees? If so, does the card’s reward rate justify paying them?
• Is the credit limit sufficient? Will the credit limit comfortably cover my expected expenses?

Answering these questions would help you evaluate whether you really need a credit card, which one you should get, and what precautions you should take to manage it efficiently without paying unwanted charges or falling into a debt trap.

Remember: Credit cards are a tool, not free money.