Credit Cards: Types, Fees, and Best Practices

What Is a Credit Card?

It is a physical card made of plastic or metal, generally issued by a financial institution, such as banks and Non-Banking Financial Company (NBFC). You can use it to borrow funds up to a predefined limit for paying bills and purchasing various items. 

Depending on the card, you can also use it to withdraw cash from ATMs. Interest is charged on the borrowed money if applicable, and by a certain billing date, you must repay the entire amount or make instalment payments over time.     

In this module, we will learn in detail about various types of credit cards and how to choose the right type based on your needs. We will also delve into best practices while using a credit card. 

Here are four basic terms to know before using a credit card:

• Cardholder – The person to whom the card has been issued. 
• Issuer – The financial entity that issues the card.
• Merchant – The business that accepts payments via credit cards. 
• Credit limit – The maximum amount you can borrow against the card. The issuer decides the limit based on your income, creditworthiness, loan repayment history, etc. 

How a Credit Card Works in India? 

Once you apply for a credit card, the issuer evaluates your current financial situation and history to determine your creditworthiness. They gauge your suitability to receive credit and if you are capable of repaying it. If they approve your application, the card will be issued to you. But, what happens next? 

• You receive the card along with relevant documents outlining your credit limit, fees, interest rates, payment due dates, and terms and conditions. 
• It is ready for use after you activate the card online or via a phone call. 
• You can insert, swipe, or tap the card at any merchant outlet that accepts credit card payments or share the card information online to make purchases. 
• Next, the card details are conveyed to the merchant’s bank. The bank receives authorisation to process the transaction from the card network.  
• After verifying your card information, the issuer can decline or approve the transaction. 
• If the transaction is approved, the merchant receives the payment, and the transaction amount lowers the credit limit available to you.  
• At the end of your billing cycle, the issuer sends you a statement listing all the transactions carried out in that month, your previous and new balance, the minimum payment due, and the due date. 
• You can fully pay the outstanding balance by the due date to avoid interest charges. Or, you can pay the minimum amount and carry forward the balance to the next month. In the second case, you are charged interest on the outstanding amount. 
• Depending on the card type and spending habits, you can enjoy cashback, reward points, etc. 
• Credit cards come with a Card Verification Value (CVV) and PIN to ensure the security of sensitive data. 

If you need a substantial amount of cash for an unexpected situation but your withdrawal limit is not enough, you can get a loan against a credit card. However, the loan interest rate can be high, as no collateral is involved, and the issuer is at a greater risk in case of a default. 

Types of Credit Card 

Broadly, you can choose from personal credit cards and business credit cards. While the former is for individual usage, the latter is issued for established businesses. Let’s explore the common credit card types in more detail: 

• Standard – These basic cards are apt for general expenses and might offer reward points or cashback. 
• Reward – These cards offer points on each transaction. You can redeem them for travel, merchandise shopping, or vouchers. 
• Cashback – You receive a percentage of the amount you spend as cashback. It can be redeemed against the balance outstanding or credited to your account. 
• Fuel – These cards provide cashback, surcharge waivers, or discounts at petrol pumps. 
• Travel – Frequent travellers can use these cards to avail of airport lounge access, flyer miles, hotel discounts, and insurance.    
• Shopping – These cards offer reward points, discounts, and cashback on transactions done on certain online shopping platforms, at specific retail outlets, or during special sales. 
• Entertainment – Such cards provide cashback, discounts, and offers on tickets for movies, events, shows, and dining and luxury lifestyle activities. 
• Premium – Aimed at high-income individuals, these cards provide perks like higher credit limit, concierge service, premium airport lounge access, etc. 
• Business – These cards offer rewards customised to business expenses, features such as expense monitoring, and higher credit limits. 
• Corporate – Corporate credit cards are issued to big organisations that offer the same to their employees to meet authorised business expenses, such as hotel stays and flight tickets.  
• Women – Tailor-made for women, these cards offer benefits like insurance, cashback, fuel surcharge waivers, shopping rewards, and travel perks. 
• Secured – These are issued against a security deposit to those with a poor or limited credit history. 
• Student – Students can build a credit history with these cards, which feature low credit limits and relevant reward points, cashback, and discounts. 
• Lifetime free – You don’t need to pay any annual fees for these credit cards during their entire lifetime. 
• Contactless – You can tap these on terminals enabled with contactless technology for small-value transactions. 

Credit Card Fees 

Wondering how to manage your finances smartly? This is where knowing about the different fees associated with a credit card is essential. 

• Joining – Some cards might have a one-time joining fee. Based on your spending pattern, you might get a waiver.  
• Annual – This is a yearly charge you need to pay for the card’s usage, and a waiver is possible based on your spending pattern. 
• Late payment – This fee is charged if you don’t pay the minimum due amount by the due date. 
• Cash advance – This fee is charged if you use your card to withdraw cash. 
• Over-limit – A fee is charged if you exceed the specified credit limit. 
• Balance transfer – This fee might be charged if you transfer one card’s outstanding balance to another. 
• Card replacement – You might need to pay a fee if your card gets stolen, lost, or damaged. 
• Foreign transaction – A percentage of the transaction amount is charged when transacting on international websites or in foreign currencies. 
• Reward redemption – Some cards might charge a fee when you redeem miles or reward points. 
• EMI conversion charges – You might be charged while converting a high-value purchase into EMIs. 
• Revolving credit charges – These interest charges apply if you pay only the minimum due amount and carry forward the balance to the subsequent month. 

Choosing the Right Credit Card  

Before making a choice, assess your financial needs, habits, and preferences. Also, consider the following to zero in on a card that complements your goals and lifestyle. 

• Identify the areas of maximum spending, be it groceries, shopping, travel, or dining. Pick a card that offers benefits in such areas. 
• The card should support your financial objectives, whether they involve building credit, earning cashback, getting discounts, or accumulating travel perks. 
• Compare multiple cards based on their credit score requirements and the credit limit offered. Choose a combination that aligns with your situation and needs. 
• Decide whether you want a card with or without an annual fee. Sometimes, a card that charges a fee might offer benefits that outweigh the cost. 
• Select a card that comes with competitive interest rates, as you may need to carry forward a bill balance to the next month. 
• Look for cards with introductory offers that help you save significantly. It might involve a free balance transfer or a 0% Annual Percentage Rate (APR) for a certain period initially. 
• If you travel abroad often, consider getting a card that charges zero or low fees on transactions in foreign currencies. 
• Check if the credit card has advanced security features to protect you against fraud. 
• The issuer should be reputed, with a robust customer service team. Go through their reviews online and ask how they can be reached via phone, email, or in-person channels. 
• Find out if the card allows customisation by tweaking the credit limit, picking bonus categories, or adding special features. 
• Clarify redemption options in case the card offers rewards. You can redeem points through merchandise purchases, cashback, travel bookings, etc. 
• Review the terms and conditions closely, especially regarding various fees, charges, and grace periods. 
• Compare multiple issuers and credit cards. 

Best Practices While Using a Credit Card  

While a credit card helps you buy things you cannot pay for right away, it is easy to end up in debt if you don’t use it responsibly. So, these are the best practices to follow for building a good credit history and maintaining positive financial health:  

• Pay your bills on time, as late payments can incur charges and hamper your credit score. Set up auto-pay if necessary. 
• Try to pay off the outstanding balance completely by the due date instead of carrying anything forward to the next month. This prevents interest accumulation. 
• Never utilise more than 30% of your credit limit, as it poorly reflects your creditworthiness. 
• Purchase only what you can afford. Ensure your monthly budget allows you to make credit card bill payments easily. 
• Avoid applying for multiple cards within a short period, as it indicates desperation and poor financial management skills. If your application gets rejected once, wait a few months before reapplying. 
• Check card statements regularly to ensure there are no suspicious or fraudulent transactions. If you spot discrepancies, contact the issuer immediately. Sign up for notifications to track spending easily. 
• Beware of various frauds and scams, and share card details only on secure websites.   
• If having too many credit cards affects your financial health, consider closing the expensive ones or those that are rarely used. 

Learn More

Now that you know what a credit card is, how it works, the different types, how to pick the right one, and ways to use it responsibly, research and compare the various options available to make an informed choice.