Credit Cards: What They Are, How They Work, Benefits, and the Complete Guide to Applying for One

In the changing financial landscape, credit card usage has become almost unavoidable for nearly everyone. Earlier, when people needed money at the end of the month, they used to borrow from others. But now, credit cards have taken that place. With the flexibility to pay the bill about a month to 45 days after spending, many people are now using credit cards. Let us now understand comprehensive details regarding credit cards in this context.

Credit cards are highly useful for simplifying daily expenses, purchases of goods, gadgets, household appliances, and much more.

Credit cards can be used for both online and offline transactions. Typically, everyone’s needs differ, and credit cards are available with various features tailored to those needs. Understanding which features of a credit card suit you is an important aspect. Which bank offers which type of credit card? Which card provides what kind of benefits? Let us delve into these topics in detail.

What is a Credit Card?

Even if there’s no money in your savings account, a credit card helps facilitate financial transactions. A credit card essentially acts as a lending card. Generally, we borrow money on the condition that we pay interest or repay it by a specific date. However, credit cards allow you to borrow money without paying any interest, provided you repay the borrowed amount within approximately 45 days.

Typically, the credit limit taken through credit cards are meant for purchases. They are not intended for withdrawing cash. If cash is withdrawn using a credit card, you will need to pay a high interest rate. Hence, credit cards are designed for purchasing items rather than withdrawing cash.

A credit card, made of metal or plastic, is issued by a bank or any financial institution. If you repay the credit card balance within the stipulated time, you won’t have to pay even a single rupee extra. Paying your credit card bill on time every time also improves your credit score. Most companies and institutions now allow bill payments through credit cards. We can also pay the credit card bills using another Credit card. Here is the step-by-step Guide

Benefits of Credit Cards

Even in emergencies, when you don’t have cash on hand, credit cards are incredibly useful to meet financial needs. Additionally, credit card transactions often provide benefits like reward points and cashback. You can also enjoy perks such as free access to airport lounges and travel insurance. If used efficiently, credit cards can help you purchase almost everything—services, goods, appliances, gadgets, and more. From paying insurance premiums to various fees, credit cards can cover all kinds of services and purchases.

Welcome Gift

Many banks offer welcome gifts to new credit card applicants, including vouchers and discounts as benefits.

Rewards Program

For every transaction made with a credit card, companies offer reward points. These points can be redeemed to purchase items or converted to cash while paying bills.

Petrol and Diesel

Certain types of credit cards provide monthly cashback when you purchase fuel by waiving the fuel surcharge.

Cashback Benefits

Many credit card providers collaborate with shopping platforms and companies to offer cashback on transactions, helping you save money.

Lifestyle Benefits

Credit cardholders can enjoy lifestyle benefits like discounts on dining, shopping, wellness, and entertainment.

Travel Benefits

Credit card users often get perks such as complimentary airport lounge access, travel insurance, and hotel offers.

Add-On Card

With the add-on card feature, you can provide a credit card to your family members. The credit limit of the primary card is shared with the add-on card.

Insurance Coverage

Certain premium cards offer insurance for air accidents, life, and baggage loss, providing these services free of cost.

Balance Transfer

If you own multiple credit cards, you can transfer the outstanding balance from one card to another for easier management.

Global Acceptance

Some credit cards are designed for international travelers and are accepted in other countries.

EMI Facility

Payments made with a credit card can be converted into EMIs, allowing you to repay outstanding amounts in easy monthly installments at a lower interest rate.

Credit Score

Having a credit card helps improve your credit score. Making timely payments every month ensures a healthy credit history. This makes it easier to secure loans in the future and boosts your creditworthiness. However, failure to manage your credit card or make payments on time can severely affect your credit score. Efficient use of credit cards will enhance your credit score and loan eligibility.

 

Types of Credit Cards

1. Co-Branded Credit Cards
   Some institutions partner with other companies to issue co-branded credit cards. For example, an online shopping platform or a food delivery company may collaborate with a bank to offer a credit card. These cards provide greater rewards or cashback for payments made through their respective platforms.
2. Rewards Credit Cards
   These credit cards offer rewards for specific transactions.
3. Travel Credit Cards
   These cards provide benefits like free airport lounge access.
4. Cashback Credit Cards
   Designed exclusively for cashback benefits, these cards offer cashback on transactions.
5. Shopping Credit Cards
   Created for shopping enthusiasts, these cards provide discounts and reward points on purchases.
6. Fuel Credit Cards
   Ideal for regular fuel buyers, these cards offer cashback on fuel transactions.
7. Premium Credit Cards
   These cards cater to the special needs of premium users.
8. Lifestyle Credit Cards
   Perfect for lifestyle needs like dining and entertainment.
9. Business Credit Cards
   Specifically designed for business professionals.

Eligibility Criteria for Credit Cards

To obtain a credit card, the following criteria must be met:

• The applicant must be an Indian citizen.
• Must be at least 18 years of age.
• Should have a stable income source, such as a salary or any other consistent revenue.

Documents Required for Credit Card Application

1. Identity Proof
   • A government-issued identity proof is mandatory to apply for a credit card. Commonly accepted documents include:
     • Aadhaar Card
     • PAN Card
     • Driving License
     • Passport
     • Voter ID
2. Address Proof
   • For address verification, the following documents are required:
     • Electricity Bill
     • Landline Phone Bill
     • Aadhaar Card
     • Ration Card
3. Income Tax Returns
   • Some banks, especially for certain card types, may require details of your annual income tax returns.
4. Salary Slips
   • If you are a salaried individual, you may need to submit salary slips for the past one to three months.
5. Application Form
   • Fill out the application form provided by the bank and submit it along with the required documents.
6. Passport-Size Photograph
   • Some banks may ask for recent passport-sized photographs.
7. Bank Statements
   • To understand your financial background, some banks may require bank statements for the last six months.
8. Form 16
   • Salaried individuals may need to submit Form 16.
9. PAN Card
   • A PAN card is crucial for any financial transaction. Banks primarily use your PAN card to evaluate your creditworthiness through your CIBIL score before approving the credit card.

How Does a Credit Card Work?

When you use a credit card for any transaction:

1. Transaction Approval: The card details are sent to the merchant's bank and then to the bank that issued the card. The issuing bank approves the transaction based on your credit limit.
2. Credit Limit Deduction: The amount spent is deducted from your available credit limit.
3. Billing Cycle: The bank issues a bill summarizing all your purchases within the billing period.
4. Payment Due Date: You have around 15 days to repay the billed amount from the bill generation date.
5. Interest Charges: If the full bill is not paid, interest is charged on the outstanding amount.
6. Minimum Due Option: You can pay a minimum amount due to avoid a negative impact on your credit score. However, interest will still apply to the remaining balance.
7. Repeat Cycle: If you pay your dues on time, no interest is charged, and your credit limit is replenished for the next cycle.

How to Choose the Right Credit Card?

1. Analyze Your Spending Habits:
   • Choose a card that suits your expenses and income.
   • For example, if you spend more on fuel, opt for a fuel-specific card.
2. Check for Rewards and Cashback Offers:
   • Select a card that provides benefits like reward points or cashback based on your needs.
3. Annual Charges:
   • Be aware of any annual fees charged by the bank.
4. Welcome Bonuses and Offers:
   • Look for cards offering attractive welcome bonuses or gifts.
5. Special Benefits:
   • Consider the offers, discounts, or deals provided by the card issuer.

How to Apply Online for a Credit Card?

To apply for a credit card online, follow these steps:

1. Visit the bank’s official website.
2. Enter basic details like employment type, PIN code, mobile number, first name, and last name.
3. Verify your mobile number using an OTP.
4. Browse the list of suggested cards and select one that suits your profile.
5. Complete the application process.

What is a Credit Card Number?

• A credit card number is a 12 to 16-digit unique identifier printed on your card.
• It is crucial for online transactions, used along with the CVV number, expiry date, and OTP.
• For offline transactions, you can swipe your card and enter the PIN to complete payments.

How to Take a Loan on a Credit Card?

You can avail a loan against your credit card in emergencies:

1. Cash Advances:
   • Cash withdrawals through a credit card are possible but attract high interest (3% per month or 36-40% annually).
2. Loans:
   • Opt for a loan instead of cash withdrawals for lower interest rates (15-20% annually).
   • Repay the loan in EMIs (Equated Monthly Installments).

How to Link Your Credit Card to UPI

To start using your credit card with UPI, download a UPI-enabled app and link your credit card. Create a UPI ID to enable seamless payments. Once linked, make payments by scanning QR codes or entering phone numbers. Select your credit card as the payment method, and the transaction is processed instantly. Currently, only RuPay cards are supported, and there are no additional charges for using UPI for payments. If you want to link your credit card to UPI apps - Here is the guide.

Frequently asked Questions About Credit Cards and Their Answers

1. What is a credit card?
A credit card is a tool used to make payments online or offline. Unlike a debit card that requires funds in your savings account, a credit card does not need an immediate balance in your account.

2. Can I apply for a credit card online?
Yes, you can apply for a credit card on the official websites of banks. You can also compare multiple credit cards on platforms like BankBazaar or other portals.

3. Will the number change when I renew an expired credit card?
When your old credit card expires, the new card will typically have the same number. However, the CVV number will change.

4. How can I get my first credit card?
If you have prior credit history, check your eligibility for a credit card and select one that matches your requirements.

5. How does a credit card work?
A credit card provides you with a line of credit, known as the credit limit. You need to pay back the bill amount by the due date after making purchases.

6. What is a credit card limit?
The maximum amount you can spend using your credit card is your credit limit. It depends on your usage and credit score.

7. Do I need to use my credit card every month?
It’s not mandatory to use your credit card every month. However, occasional transactions are recommended to avoid the bank marking your card as inactive.

8. What credit score is required for a credit card?
A credit score of 750 or above significantly increases your chances of getting a credit card.

9. Can I get a credit card without a job?
Yes, you can still get a credit card if you don’t have a job. Regular transactions in your savings account may help establish eligibility.

10. How can I get a credit card in one day?
Online application processes have made it possible to get a credit card approved within a day. However, receiving the physical card might take longer.

11. Do credit cards offer airport lounge benefits?
Yes, many credit cards provide complimentary access to airport lounges as a benefit.

12. Are credit cards beneficial?
Yes, credit cards often provide reward points for every transaction. These points can be redeemed, and many cards also offer cashback offers.

13. How many credit cards can I have?
There is no specific limit on the number of credit cards you can own. It depends on your financial situation. However, managing them wisely is more important than having many.

14. Can I get a credit card without a credit score?
If your credit score is below 750, you might still get a credit card based on a fixed deposit or other security.

15. What is the easiest way to apply for a credit card?
The simplest method is to apply through a bank’s official website.

16. What is the minimum due in a credit card statement?
The minimum due is the least amount you need to pay if you can’t pay the full balance. It is usually 5% of the total outstanding amount.

17. Is there a processing fee for loans through credit cards?
Yes, banks typically charge a nominal processing fee for loans taken via credit cards.

18. Can credit cards be used in other countries?
Yes, credit cards can be used internationally if they have global acceptance. However, international transactions may incur higher charges.

19. Does late payment affect my credit score?
Yes, late payments can impact your credit score depending on how late the payment is and the amount unpaid.

20. What are the charges for cash withdrawal from a credit card?
Cash withdrawals usually incur charges of 2.5% to 3% of the amount or a flat fee of ₹250 to ₹500, depending on the bank.

21. What should I do if I lose my credit card?
Immediately inform your bank and request them to block your card.

22. Can I get a credit card without a credit score?
Yes, but banks may charge higher fees. Alternatively, you can get a card against a fixed deposit.

23. How is the credit limit decided?
Your credit limit depends on your monthly income, credit score, and repayment behavior.

24. Are there charges for international purchases?
Yes, banks charge between 1% and 4% for foreign transactions made on your credit card.