What is a credit card?
A credit card is a physical card that has a predefined balance in it that you can use at merchants that accept the credit card. Basically using a credit card you can pay even if you do not have cash hence it is very important to use a credit card wisely.
E.g. Different banks offer different types of credit cards and depending on the eligibility one can request a credit card. The balance that a bank offers on a card depends on various factors like age, income, credit score, etc.
How does a credit card work?
Step 1: You are done with your purchase and you give your credit card at the billing counter. The merchant will swipe or insert the card in the POS or point of sale machine and you will be asked to enter your pin.
Step 2: The machine reads the magnetic strip in the card and sends information (like validity, credit balance, pin, and identity) to the issuing bank. Once the bank verifies and confirms the payment is processed and completed.
Important terms in credit card
Interest:
This is a very important term that we should always remember. Using a credit card is like borrowing money from the issuing bank and you will be charged interest if you do not pay the entire bill within the due date. In the bill there are two options to pay, one is the entire payment and the other is the minimum payment. If you pay the entire bill no interest will be charged but if you pay the minimum bill interest will be charged. This interest is very high. If you default on bill payment you will have to pay a penalty fee as well as interest.
Credit limit:
The credit limit is the upper limit set by the bank above which you cannot spend using a credit card. This can be increased if all your transactions are smooth and there is no default.
Billing cycle:
This is the fixed period in which you can make purchases until the bill is generated. Make sure you make a purchase at the beginning of the billing cycle so that you get a more grace period to pay the bill.
E.g. Billing cycle – 8 Sept to 7 Oct. Bill date – 8 Oct. Bill due date – 25 Oct.
Minimum payment:
The minimum payment is the amount you have to pay when the bill is generated and the remaining amount will be carried forward next month but interest will be charged on that. It’s always better to pay the full bill amount.
How to use a credit card?
The below pointers will help you understand how to use a credit card wisely.
Plan your purchase:
Depending on your billing cycle you can plan your purchase. If you can use a credit card at the beginning of the billing cycle you can get more time to pay the bill.
E.g. Billing cycle – 8 Sept to 7 Oct. Bill date – 8 Oct. Bill due date – 25 Oct. In this example, if you use the credit card by 10 Sept you can get the entire month as a grace period since the bill’s due date is 25 Oct.
Plan your repayment:
Make sure you have the amount handy before you swipe your credit card so you can pay the bill on time. Though this is not mandatory, it’s a good practice. So that the amount in your bank account can earn some interest during the grace period.
Do not use the entire limit:
Using a credit card can be tempting since you do not need cash in your account. But make sure you spend only 30% of the credit limit and pay bills on time. This will help you maintain a good credit card score. One should be very disciplined while using a credit card. If one has a bad spending habit it’s recommended to avoid using credit cards.
Pay the entire bill, not the minimum amount:
Always pay the entire bill before the due date of your credit card. There is an option to pay the minimum bill as well but if you pay the minimum bill the remaining amount will be carried forward to next month and it will incur high interest.
Keep track of spending and check credit card statements regularly:
Make sure you track the spending on credit cards and check credit card statements regularly as this will help identify any purchases that can be avoided or not needed.
Also, this will help you find out any fraudulent transaction that was done on your card.
Use reward points:
One more benefit of using a credit card is you get some reward points that are predefined by the issuing bank. Make sure you redeem those points before it expires. Some banks offer movie tickets, dinner discounts, etc along with reward points. Make sure you are aware of all the freebies that come along with a credit card.
Negotiate annual maintenance fees on credit cards:
You can try to negotiate the annual maintenance fees with the customer care of your issuing bank. If you have been using the card for 1 to 2 years and you have a smooth track record with the bank you can ask for waiving off the annual charges. They might consider it or may give some other benefits.
Set auto debit for bill payment:
If you miss the due date and the bill is not paid then a penalty fee and interest is charged, which can be very high. If you are on vacation or forget to pay your bill you will have to pay almost double the charges. So it’s better if you set the auto-debit i.e. you can set a date with the bank and on that date the credit card bill will be paid obviously before the due date.
Conclusion:
Credit cards can be a good option in times of financial crunches or emergencies. But at the same time, it can be tempting to use all of the credit limits on shopping or dinner. One should be disciplined and need to have financial literacy while using a credit card.
To know more about personal finance, click here.
