Loan Singh Explains – A Beginner’s Guide to Credit Cards

credit-card-beginners

Introduction

Being a digital lending platform, we are compelled to write more and more about Credit Cards. This is because majority of our borrowers, who have availed a personal loan from Loan Singh, are credit card holders. So, ensuring that you manage both, i.e. your credit card and personal loan, is crucial to a debt-free life. Both, personal loan and credit cards, are unsecured credits. Both are provided based on your credit repayment history.

Credit cards play an integral part in every millennials lifestyle. It provides financial convenience and, at times, is also an emblem of social status. However, you need to smartly tread the line of credit card usage. There is no room for any defaults, as your CIBIL score will bear the brunt. A poor CIBIL score will prevent you from getting credit approval in the future. For those who cannot figure out head or tail of a credit card, we thought we could mention different facets of the popular plastic money.

 

What Does A Credit Card Do?

A credit card is a rectangular piece of plastic that is equipped with a magnetic strip. This magnetic strip, on the back of the card, houses your registered account information with the card issuing company. Your name and credit card number, on the front, act as the identifier. Swiping the card allows the magnetic strip on your card to identify your credit account and process the payment at POS terminals. The card details also help you pay for online purchases. As mentioned earlier, a credit card is an unsecured type of credit. Your CIBIL score and monthly income determine if you are worthy to avail a new one. A revolving account is created by the card issuing company, granting you a line of credit. You are assigned a credit card limit, which is a threshold set by the card company, for you to spend on credit. You can later pay back the amount spent, during a fixed tenure, along with interest and charges. The credit card also contains an RFID chip that protects your card against identity theft.

When you use your credit card to make payments, the merchant validates your credit account and asks the bank if the payment can be processed. If all goes well, your purchase is added to your credit account. Merchants pay fees to credit card companies – to accept credit cards at their end; and credit issuing companies (or banks) receive the merchant fee as revenue. All these expenses and purchases are recorded by the card issuing authority, and sent to you in the form of a bill.

A billing cycle is a period set, within which all purchases and payments are accounted for and billed. It is usually set for 30 days. A grace period of 15-25 days is added to the total number of days of the billing cycle. If the previous month’s balance payment is made before the end of the grace period, no charges are incurred by the cardholder. In case the card holder fails to pay the total outstanding amount by the due-date, a minimum balance has to be paid to the credit card company. This amount is usually 5% of the total balance.

 

12 Pointers for Beginners

We described above, in short, what a credit card is and how it works. Now let’s know more about the various facets of a credit card. There are charges and limits to keep in mind because a credit card is essentially a debt instrument.

Annual Charges

Credit card companies charge a joining fee when you are issued a credit card. Sometimes, credit card companies may exempt you from paying an annual fee for a particular period – normally, first 12 months. Some offer a ‘Lifetime Card’ which bears no annual fees. Approximate charges for joining fees are between Rs.1,000 to 3,000 – depending on the type of credit card. Sometimes on request, the banks or credit card companies may waive-off annual fees based on your monthly spends.

Credit Limit

You can spend money from your credit card only up to a pre-set limit. The limit is set by the credit card issuing company, and depends upon your income and credit repayment history.

Credit Card Statement

A monthly credit card statement is generated for the card holder which details all the transactions made using the card. The statement also shows the pending credit card balance, payment due-date, minimum amount payable, and other important details.

Duplicate Statement or Loss Charges

The monthly statement is delivered free of cost to your email address. But, physical delivery of the card statement’s hard copy is charged.

In case your credit card gets lost, you need to pay for a replacement credit card. Even withdrawal from an ATM using your credit card against the credit limit invites a charge. These charges differ from company to company.

Outstanding Balance

If you do not pay-off any of the outstanding balance in full each month, then an interest is levied on the remaining amount. The interest amount varies from company to company. If you do pay it, no interest is charged.

Minimum Amount

You have to pay a minimum due amount for each billing cycle. This is usually 5% of the outstanding balance. If you continue to pay this minimum amount, your credit will not cease to operate.

Bounced Cheque

If you make the payment towards your credit card bill via cheque and if the cheque bounces, a fixed rate is charged by the bank or issuing company. If the bank or credit card issuer sends an agent to collect the cheque from your physical address, then a fee is charged for that as well.

Service Tax

The expenses you make via your credit card are subject to service tax. Service Tax is waived-off for an amount up to Rs.2,000

Late Charges

Banks, or credit card companies, employ collection agents to retrieve outstanding amounts from defaulters. These charges are levied to make up for the expense incurred by the bank or credit card issuer in collecting the outstanding amount. A late payment fee can be either fixed or a certain percentage of the minimum outstanding balance. The fee is usually levied 90 days after you fail to pay the minimum amount towards your card. 

Stick To One

Ensure you are comfortable handling your first credit card. Then think of applying for more. Applying for one in haste can lead to missed payments and direct your CIBIL score to oblivion.

Reward Points

The reward points accumulated over a period of time can be redeemed for cash back or air miles depending upon the reward points program.

Foreign Currency Transaction

In case you travel abroad and use your credit card towards transactions, the same transaction amount is converted to Indian rupees and a certain percentage of that value is charged by the bank or credit card issuer.

 

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