Credit cards are exceptionally useful to handle financial liabilities. However, there are certain prevalent misconceptions even among existing users regarding what is a credit card and how to best use it to manage personal finances. This misunderstanding can lead to excessive debts and defaults. Therefore, it is vital to understand every aspect of credit cards before you use one.
What is a credit card?
A credit card allows you instant access to pre-set line of credit made available by a financing company. With this credit, you can purchase products and services via the credit. At a predetermined date every month, you have to clear the credit utilised with the card and regain the same as utilisable credit limit.
Remember, credit cards levy interest on the amount you spend using the same. Therefore, at the billing date, you not only repay the credit but also clear the interest on the borrowed sum. The ability to purchase products on credit is what makes credit cards better than debit cards.
Now that you know what is credit card, here are a few other things you should know about such cards.
- Limited credit availability
Credit cards do not offer you an infinite amount of funds as credit. You must adhere to the credit card limit at all times. If your credit limit is Rs. 1 Lakh, you can purchase products and services worth up to that amount. However, you can request your credit card company to increase this limit for further usage.
- Maintaining your credit score
Individuals looking to avail credit cards need to maintain a decent CIBIL rating. This rating or score determines your creditworthiness after considering your credit history. A credit score above 750 considered substantial to avail cards with the best financial terms and features. People scoring below this, however, have a greater likelihood of facing credit card rejection.
If you have never availed a loan or card, you will lack a credit score. Build a credit history and suitable CIBIL rating before applying for a credit card, in such a case.
- Proper usage of reward points
Most credit cards, such as the Bajaj Finserv RBL Bank SuperCard, offers reward points on expenses through the card. The more you spend, the more points you gain. You can then redeem these points for attractive discounts, cashbacks, vouchers or even cash. This is one more reason why a high credit card limit is useful as it allows you to accumulate more points. Keep in mind though, that points must be used within a specified time, after which they expire.
- Billing cycle
Understanding the billing cycle is vital to use a credit card effectively. For example, if the billing dates for your card are the 10th day of each month, you must clear all outstanding dues either before or on that particular day. Late payment results in penalties and degrades your credit rating.
- EMI facility
Another crucial benefit of credit cards is their ability to turn any of your purchases into equated monthly instalments or EMIs. This saves you from paying the entire sum at the next billing date. Instead, the cost of a product is distributed equally over a certain period. However, EMIs are not interest-free. You incur a specific interest on the price of the product if you avail the EMI facility.
- Secured credit card
If you cannot avail a credit card due to poor credit rating or insufficient income, you can still opt for a secured card against collateral. The credit limit in such a case depends on the valuation of the asset pledged as collateral.
Understanding what is credit card and how to use it effectively help you easily manage your finances. Make sure to repay the sum total of credit card dues before the due date to enjoy the features and benefits offered by the card to the best.