What is a Credit card?

Credit card: What is it?

A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holders promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

How does it work?

After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal of the establishment that you are using your credit card at dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee. Put simply, the card is swiped at the establishment>the bank or financial institution is contacted>authenticity is established>payment is approved>receipt is received.

The Pros and Cons

Pros

You don't have to carry a large amount of cash all the time

Purchasing power increases because of the higher credit limit being offered to customers

Almost all major establishments accept credit cards

You can buy things online

Credit cards also serve those who frequently travel internationally

Cons

Uncontrolled spending can result in a bad financial situation

Credit cards are prone to security issues when spending online

Credit cards impose high interest rates and other applicable fees. So if you do not make the payments as soon as possible, you might end up paying more than the price of the item or service you purchased.

The Charges

Interest rates: Most banks charge over 30% p.a or 2.79% to 3.9% per month on outstanding amounts. These figures can even go up to 45%.

Late payment fee: Credit card companies normally charge Rs 350 per month on outstanding amount less than Rs 10,000. For outstanding balances between Rs 10,000 and Rs 20,000 the charges are Rs 500 and can go up to Rs 600, for higher amounts.

Overdraft charges: There is a charge if a customer exceeds the credit limit. This varies from issuer to issuer.

Overdue: For overdue accounts and payments that companies collect by sending an executive to the customer, there is a fees of Rs 50 to Rs 75. This charge is passed on to the customer.

Cash advance: If the card holder withdraws from the ATM, there is a charge of 3% on the total money withdrawn or Rs 300, whichever is higher. For money drawn through a branch, credit card companies levy an additional fee of Rs 500.

Joining and annual fees: A lot of credit card companies offer credit cards with no joining charges. However, they later charge the annual charges.

Duplicate statement charges: Many banks charge anything between Rs 25 and Rs 200 for duplicate statements.

Dos and Don't s

Dos	Don'ts
Make wise decisions about purchasing items you need versus those you simply want. It is important to distinguish between the two.	Use your credit card to make everyday purchases like food, clothing, and petrol. Using your credit card as a substitute for cash will land you in unnecessary debt.
Pay on time, within the due date. Consecutive missed payments will make you defaulter and result in a poor credit score.	Get into the habit of making minimum-only payments. Making only the minimum payment each month increases the amount of time it will take to pay off your debt.
Stay within 30% of your credit limit.	Use your credit card to buy things you can't afford.
Read your credit card statement carefully.	Withdraw cash from an ATM using your credit card. Not only will you be charged a withdrawal fee, but the interest will levied from the moment the cash is withdrawn

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