As Indian Govt pushes for cashless transactions use of credit card has now become almost unavoidable in India. In this article let us see what a credit card is, how to choose the best one for yourself and few don’ts with credit cards.
What is a Credit Card?
As the term suggests Credit card is nothing but a loan card. While buying a credit card the bank/card issuing company gives you a limit amount called credit limit up to which you can use it. The usage is very similar to using a debit card with the only difference is you use the debit card for the money you already hold in your account whereas in credit card you first spend the money and later you pay it back to the bank.
In general Credit Card Company gives you a time period from 15 to 50 days where you can pay for the purchases without any interest. If you fail to you may end up paying back the amount with interest and late payment fees.
What is a cycle date/Bill date?
A cycle date or bill date is a date when the company generates a bill for the purchases you made for the past 30 days (1 months/1 billing cycle).
What is a due date?
A due date is a date before which you should complete the payment for the bill raised by the company for the purchases you made before the bill date. Due date is usually 15 to 20 days from the bill day which may vary from company to company.
Let us see an example of how a credit card works basically.
Let us assume today’s date in 16th June 2018. Rajesh has a credit card with limit ₹50,000 and his billing date is 15th of every month. Rajesh wants to buy a washing machine worth of ₹35,000 but he doesn’t have the money for it immediately. However, he will be able to pay on 1st when his salary comes. So he decides to use his credit card to buy and makes the purchase and pays through his credit card. On 15th July 2018, his credit card company will send the bill for the ₹35,000 which he should pay by 5th August 2018 (due date). If he pays before 5th August 2018 he need not pay anything extra (as interest/late fee) but if he fails to do so he will have to pay a hefty interest (chargeable on per day basis) and few late payment fees.
Credit card Don’ts
Now let us see what you should not do with credit cards.
There is something that I did intentionally hide from you earlier in this post. That is, every credit card has another limit called ‘Cash limit’ up to which you can withdraw money thru ATM’s. The reason why I did not disclose earlier is, even though the company provides a limit to withdraw cash you should not use it because of the heft charges (around 2.5%) and interest for the amount (around 2.5% to 4%) monthly. Hence it is advisable to not withdraw money from your credit card.
When you make a late payment you not only pay a late payment fee of ₹100 to ₹750 but also interest around 3.5% per month on daily basis.
The above picture is an illustration of interest rate from ICICI Bank. Apart from the Interest rate, the customer will have to a late payment fee of around 500 and GST for interest and late payment fee @18%.
Yes, you heard it right; never make an offline payment through cash or cheque (especially outstation cheques). Cash payments will attract a fee of around 100 (may vary bank to bank) in addition to your bill amount. For outstation cheques, a fee of 1% of the cheque value, subject to a minimum of 100 is also charged. (This may vary bank to bank). Also when you pay via cheque your credit limit will be realized only when the cheque is realized.
Always utilize only 30% of your credit limit. If you use more than that it may have a negative impact on your credit score (especially 100% of your credit limit).
Don’t close old credit cards
When you start using credit cards you may like to switch to a different provider but don’t close your oldest credit card unless you want to close it 100%. The reason is older credit cards will give better credit score and help you improve the credit scores.