What Is A Credit Card?
(Here’s where we break it down)
A Credit Card is something that we all want, some of us have, but a lot of us don’t quite completely understand its nature. In a way, owning a Credit Card increases your purchasing power. You can use it to purchase all that you can afford, and all that you can’t quite buy cash down.
A big number gets swiped off your Credit Card limit, which you can then repay in easy installments. ‘Buy first, pay later’ is the mantra. It’s all so simple and easy until the Credit Card bill lands in your inbox. It’s shock at first sight and then confusion. A zillion charges you don’t understand. You call the customer care of your card issuer and squabble with the person on the other end of the phone for an eternity. The result – you still don’t know what the extra charges are and how you amassed them.
There is no denying that Credit Cards have made life easy. Not only do they boost your purchasing power, but also save you from carrying wads of cash. They are slick, safe to use, and sit snugly in your wallet. Hence, we want to ensure that you thoroughly understand the nature and benefits of Credit Cards. This guide aims to give you a thorough understanding about the product. So just relax and read on. You’ll be quite the Credit Card pro at the end of this. You’re welcome.
How Do Credit Cards Work?
(The magic behind the scenes)
Swipe your card, punch your pin, sign the paper receipt – that’s it! Well, there’s more to it than meets the eye. We’ll take you through it.
Credit and Debit Cards are the forerunners of cashless transaction around the world. They are easy to carry and convenient to use. Above all, they mitigate the risk that comes with carrying cash. Hence, they are a preferred and popular mode of making payments – be it for shopping, paying utility bills, EMIs.
Easy on the surface, there’s a whole lot of work that goes on in the background to make a Credit Card payment as seamless as it is. There is an entire army of people overseeing the initiation, processing, settlement and payment of a Credit Card transaction. Here’s a quick overview of it.
Credit Card transaction process – Initiation, processing and settlement
To facilitate a Credit Card transaction, a Credit Card Association (Visa, MasterCard) must have Credit Card issuing as well as acquiring banks in its network. Issuing banks are the ones which issue or sell Credit Card and acquiring banks are the ones that tie up with merchants/vendors to accept an association’s cards. Once a network of issuing and acquiring banks is established, the process moves ahead in the following fashion.
- A Credit Card transaction is initiated when a person swipes a card at a merchant outlet.
- The details of the transaction are processed via a Credit Card machine, also known as point-of-sale (PoS) machine, which is given to the merchant by the acquiring bank.
- PoS machines then transmit details of the transaction to the issuing bank.
- The issuing bank accepts or rejects the transactions and relays the information back to the merchant. (If there is no issue with the Credit Card, transactions are approved).
- Usually, a receipt is generated for the customer as proof of payment. A copy of the same is generated for the merchant.
- Merchants are reimbursed for all such approved transactions by the acquiring bank i.e. the acquiring bank credits the merchant’s account with the approved transaction amount.
- The acquiring bank is then reimbursed by the issuing bank for the amount credited to the merchant. (The issuing bank’s account is debited by the card association and the amount is credited to the acquiring bank).
- All data transmitted between the merchant, the acquiring bank, and the issuing bank to complete and settle a Credit Card transaction is done through a Credit Card association’s network. Here, the association acts as a clearing agent between the issuing and the acquiring banks.
- The issuing bank records all such transactions made by the customer at various merchant outlets and bills him/her for it. The customer/cardholder then has to pay the issuing bank for all purchases recorded in the bill, usually on a monthly basis.
- The issuing and acquiring banks take care of payment to be made to merchants on behalf of the customer, thus allowing the customer to buy goods and services on credit. Once the credit period is over, customers repay the issuing bank.
In case of online transactions, when the PoS machines is not available, customers punch their Credit Card details on the merchant’s online payment portal. The transaction is then processed through the issuing banks’ secured payment gateways. The only difference is that instead of physically visiting a merchant outlet, Credit Card information and transaction details are collected and approved online.
But what are these Credit Card Associations we have been talking about?
A Credit Card Association is a network of banks that issue and acquire Credit Cards and oversee all related transactions. The two most popular Credit Card associations are Visa and MasterCard (yeah, they are associations. You didn’t quite guess it, did you?). Other well-known associations are American Express (AmEx), Diners Club International etc.
Every Credit Card Association develops, maintains, governs, and licenses their own Credit Card programs. All Credit Cards carry the brand of the association they belong to. It’s important to know that the associations themselves don’t issue cards. Their cards, packed with unique programs, are issued to customers through issuing banks. The role of the association is to facilitate transaction between the issuing and acquiring banks for all cards belonging to their network. They establish a network of merchants, acquiring and issuing banks so that cards belonging to their association are widely accepted. VisaNet and BankNet are the networks used by Visa and MasterCard, respectively.
The terms issuing and acquiring banks still confusing you? Well, here is the explanation.
- Issuing Bank: All Credit Card-giving banks and financial institutions are called issuing banks. Issuing banks register themselves with one or the other association and provide Credit Cards of that association to their customers. For example, if a certain bank is a registered member of the Visa association, it’ll only issue Visa Credit Cards.
- Acquiring Bank: Merchant banks are called acquiring banks. These banks hold merchant or vendor accounts. Just like issuing banks, acquiring banks too belong to one Credit Association or another. Acquiring banks honour Credit Card transaction claims from merchants. An acquiring bank will only clear those transactions that have been made with a Credit Card belonging to the same association as them.
- Vendor/Merchant: Credit Card vendors or merchants are outlets that accept Credit Cards as a mode of payment. Vendors and merchants specify the association whose Credit Cards they accept. For example, if a vendor holds an account with a Visa acquirer, it will accept only Visa cards; a vendor which holds an account with both Visa and MasterCard acquirers will accept both types of cards.
Benefits Of Owning A Credit Card
(Of course, there’s more than one)
Getting a Credit Card is the quickest way to boost your purchasing power. It’s also a good way to build your Credit Score. Now, there is no arguing the fact that a good Credit Score is a life essential. You need it to get loans and all other financial help from banks and other financial institutions. Your Credit Score is a deal maker or a breaker, and a Credit Card is one of the first tools you can use to build an awesome score.
Here are the many benefits of owning a Credit Card – the primary being the ability to make cashless transactions.
Credit Card benefits to the card holder
- Credit purchases: Buy first, pay later.
- Instant boost to purchasing power: Allows for larger spends that can be repaid in easy EMIs.
- Swipe away: Convenience and ease of making purchases, payments.
- Ease of tracking expenses: Consolidated bill/net banking/phone intimations.
- Frill Benefits: Discounts, cashbacks, rewards and offers on almost all cards.
- Credit Score: Helps build credit history.
Credit Card benefits to the vendor
- Reduced dependency on cash transactions.
- Increase in sales owing to transacting convenience.
- Increase in sales owing to promotional offers via various Credit Cards.
- Increase in sales owing to higher purchasing power of buyers.
- Increase in sales owing to impulse shopping
- Quick, electronic settlement of sale transactions.
- Facilitates online business alongside brick and mortar stores.
Credit Cards vs. Debit Cards
(Doppelgangers with very different personalities)
Credit and Debit Cards are identical in terms of facilitating cashless transactions. However, despite their similar look, the two cards are designed to serve very different purposes. Let’s sort them out.
|Credit Cards let you buy things and services for which you can pay later. You can also make big purchases and pay the amount in EMIs.
|Debit Card transactions are settled in real time. You can only swipe as much as you have in your account.
|No account needed to operate a Credit Card.
|Linked to a Savings Account.
|Credit Cards come with a credit limits. It’s the maximum amount you can spend on your card.
|Since your Debit Card is linked to your savings account, you can only spend as much money as you have in your account.
|Interest is charged on your Credit Card’s outstanding dues. Keep in mind there are more fees and charges applicable on Credit Cards than on Debit Cards.
|Interest charges don’t apply to Debit Cards as payment is settled in real time.
|Payments made via Credit Cards are recorded in a Credit Card bill or statement.
|Spends made using a Debit Card can be tracked through bank account statements.
|Availing a Credit Card is not as easy as availing a Debit Card. You need to meet the Credit Card eligibility requirements of the issuer.
|Availing a Debit Card is easy. It is often issued when a customer opens a Savings Account.
|Credit Card usage goes towards building a good Credit Score.
|Debit Card usage does not affect your Credit Scores in any way.
What Is A Credit Card Limit?
(All that you can spend)
By now you know that all Credit Cards have a ceiling on the amount you can spend (or didn’t you?). It means there is a cap on the amount you can spend using your Credit Card. Once you cross the maximum spending limit, you won’t be able to make purchases using your Credit Card. When you make a purchase, the amount gets deducted from your credit limit. Then when you pay your Credit Card bill (in full), the issuer bank again restores the limit to the maximum.
Do all Credit Cards have the same maximum limit? No. Different Credit Cards have different limits to cater to the financial needs of people from all financial backgrounds. Essentially, the limit on a Credit Card is determined by the type of the card and creditworthiness of the customer. The better a customer’s creditworthiness, the higher the limit.
For example, shopping and travel Credit Cards have a higher credit limit than fuel Credit Cards. Also, individuals earning a good income are offered a higher spending limit than those earning not so well. In many cases, card issuers reward responsible Credit Cards users with an enhanced credit limit at no extra charge. Under regular circumstances, the card issuer bank might ask you to pay if you seek to up your card limit.
The credit limit of a Credit Card is divided into two categories – credit limit and cash limit. Let’s look at the differences between the two.
This represents the maximum amount a cardholder can spend on purchases. To state an example, let’s say you have a Credit Card with a credit limit of Rs. 50,000. This means, you can spare Rs. 50,000 in a month on purchases. If you touch the Rs. 50,000 mark in a month, then you are ‘over the credit limit’ or ‘maxing out the card’. All your transactions will be declined once you cross the credit limit.
If a transaction does overshoot your credit limit, the card issuer will levy a fee or charge interest on the excess spend. Remember, just because you have a maximum limit on your card, ‘maxing’ it out does not reflect well on your financial behaviour. It tells the card issuer that you are excessively dependant on your Credit Card and are not one of the best money-managers in town. This may also prompt them to reduce your credit limit for future spends. Now, it may so happen that your total Credit Card spend is well within the limit, but summed up with interest charges and other recoverable it shoots past the credit limit. Hence, it’s very important to be aware of all Credit Card charges and costs. We’ll discuss the various charges later in the guide.
Credit Cards are primarily used to make credit purchases, but they can also be used to make cash withdrawals at the ATMs (although it’s not a recommended practice). This offering is particularly useful if you find yourself in a cash-strapped emergency situation. The cash limit is a certain percentage of the total credit limit and not above it. If your credit limit is Rs. 50,000, then your cash limit could be anything between Rs. 10,000 to Rs. 15,000. Though card providers set a limit on cash withdrawals, going over the limit can attract a penalty.
Cash withdrawals are treated as advances and interest is charged on the amount withdrawn. Interest is charged until the total amount withdrawn (including interest and fees) is repaid. Remember, a transaction fee is levied on every cash withdrawal.
Credit Card Payment
(So you never miss or skip it)
If you want a Credit Card, you must thoroughly understand the payment structure. Missing payments will wreck your finances. So at no cost skip this section of the guide.
Let’s look at Credit Card payment terminology so that the next time you speak with the customer care representative of your card issuer, you know what’s being discussed.
Billing Cycle: A billing cycle is the time between two consecutive bill generating dates (normally a month). All spends made in one billing cycle are recorded in a bill or a statement for that period.
Credit Card Statement: All spends made during a billing cycle are recorded and intimated to the cardholder through a bill or a Credit Card statement. A Credit Card statement states the billing period, the total amount spent, individual expenses (alongside the corresponding transaction dates and merchant names), and other charges and fees. Earlier, banks used to mail a hardcopy of Credit Card statements to the cardholder’s address. Nowadays, a soft copy is mailed to the registered email address of the cardholder (The second option is better. We also save some precious trees). Go paperless!
Due Date: Due date is the last date by which you must pay your Credit Card bill. Not paying your bill on the due date will attract late-payment charges. Credit Card bill due date in India is generally 21 days after the last date of the billing period. These extra 21 days are known as the ‘grace period’ and overlap the next billing cycle. Let’s understand this with an example.
Let’s say that your billing cycle runs from the 1st to 30th of a given month. For a given month, (say June) your card statement will be generated on the 30th. However, you aren’t expected to pay your bill on that date. You have a grace period of 21 days. So you bill due date will be the 21st of the following month (July). Your bill due remains the same every month. This allows you to use your Credit Card in a planned way.
Grace Period: This is the interest-free period after a bill is generated. During this time, cardholders can clear the outstanding amount without any interest being charged on the same. The grace period is usually about 21 days long between the bill and due date. Once the grace period lapses, cardholders are charged interest on a per-day basis. This interest-free period is not applicable to dues outstanding from a previous bill.
Total and Minimum Amount Due: Total Amount Due is the total value of transactions made during the billing period. ‘Minimum Amount Due’ is a percentage of the total amount due that you must pay to avoid certain charges. This could either be a percentage of the total amount due or a percentage of the total amount due plus other recoverables, such as outstanding balances, interest charges, late fees etc.
For example, if you spent Rs. 50,000 on your Credit Card in a given billing cycle, the total amount due will Rs. 50,000. If the provider calculates the minimum amount payable as 10% of the total, then the minimum payable is Rs. 5,000. But what if interest and outstanding balances and late fees are also included in calculating the minimum amount? Keeping with the same example, suppose only the minimum amount of Rs. 5,000 is paid. The remaining Rs. 45,000 is still due. Let us suppose the total amount due is Rs. 50,000 in the next bill as well. The minimum amount due now becomes 10% of (Rs. 50,000 + Rs. 45,000 + interest payable on Rs. 45,000).
Outstanding Balance: If you do not pay your bill on the due date, or pay it partially, the unpaid amount falls under the ‘outstanding balance’ or ‘overdue’ category. Banks charge interest on the overdue amounts at a predetermined interest rate.
Let’s say for a billing cycle, your total amount due is Rs. 50,000, and the minimum amount due is Rs. 5,000, and the due date for the same is 10th May.
- If you make the payment of Rs. 50,000 on or before 10th May, your bill is cleared and no interest is charged.
- If you only pay the minimum amount due on or before 10th May, interest is charged on the balance Rs. 45,000.
- If you repay Rs. 45,000, which is greater than the minimum amount but lower than the total due, then interest will be charged on the balance Rs. 5,000.
- If you do not repay a penny on your bill, i.e. the entire Rs. 50,000 remains overdue beyond 10th May, then interest will be charged on the total amount.
You can pay your Credit Card bill in physical form through cash or cheques or via online modes, such as direct debits or transfers through net banking. Keep in mind that if you are paying your bill via cheque, then the cheque clearing date will be counted as the bill clearing date. Make sure you submit your cheque a few days prior to the due date to avoid late-payment charges. Cheques are usually cleared in about 2 working days.
How do you make payments via a cheque?
You can drop your cheque in a number of drop boxes provided by the card provider. These boxes are available at all bank branches and ATMs outlets of your card issuer. Once cheques are dropped off in the box, it is collected and processed for payment. Oftentimes, however, if cheques are cleared later than the due date, cardholders can call their card provider and request reversal of late fee or prevent levying of a late fee. Many card providers are willing to oblige if the delay is due to genuine causes or not too long after the due date.
With the advent of the internet, direct debits have become the safest and quickest way to clear your Credit Card bills. You can place standing instructions on a saving account of your choice and your credit payments will be automatically debited on the due date. You need only maintain sufficient balance in your savings account.
In some cases, cardholders pay off one Credit Card bill using another Credit Card. They do this by either withdrawing cash from one card and using it to pay down the bills of another card, or by requesting a balance transfer.
What’s a balance transfer? A balance transfer is wherein the outstanding balance on a Credit Card is transferred to another Credit Card. This is done for a minimal balance transfer fee. Sometimes, Credit Card providers waive this fee to woo new customers. But what are the benefits of balance transfer to customers? Well, customers opt for this facility to avail of lower interest rates, or to take advantage of the option of converting outstanding balances to EMIs.
Let’s assume, Bank A charges 24% interest on outstanding Credit Card dues, whereas bank B charges 18% interest. Bank B also provides the option of repaying the outstanding through EMIs. By paying a balance transfer fee, a customer can transfer the outstanding balance from Bank A’s Credit Card to Bank B’s Credit Card and save 6% on interest charge. Moreover, by making the switch, the customer not only saves some precious interest money, but can also repay the due in small, affordable instalments rather than in one big lump sum (painful on the pocket).
Converting Outstanding Balance to EMIs
Many Credit Card providers offer customers the option to convert their unpaid balances into affordable EMIs. If the outstanding balance is over a certain minimum amount, it can be broken into EMIs for lower-than-prevailing interest rates. This takes the burden of making big payments away from the customers and reduces the risk of a default too.
Exciting as it sounds, you should be wary of balance transfers and EMI options. Low interest rates on balance transfers are often limited-period offers and regular rates apply once the offer period lapses.
Settlements and Write-offs
When a customer cannot or does not pay their Credit Card dues, card providers may accept part payment on the dues in lieu of the total amount outstanding. This is called a settlement. This lets card providers recover at least a part of the outstanding amount rather than forgo the entire load.
In some cases, where customers cannot or will not settle an account, dues can be written-off. If an account remains overdue for a specified period of time e.g. 6 months, a card provider may write-off the overdue balance. This indicates that the provider cannot recover the dues from the customer. The provider then claims it as a deductible from its total tax payable. The customer’s account is then closed. However, the customer can be pursued for payment at a later date and may also come under legal fire for not paying.
Settlements and write-offs both have a negative impact on a cardholder’s creditworthiness. These miss is recorded in a cardholder’s credit report and may lead to rejection of applications for credit in the future.
Credit Card Costs – Interest Rates (APRs), Fees and Charges
(All those additional costs we grumble about)
Credit Card charges can be broadly classified into two categories – interest charges and non-interest charges.
The APR or interest rate on a Credit Card is the most obvious cost, but it’s smart to be aware of non-interest charges as well. The non-interest charges are not as popular as interest charges and, hence, might catch a Credit Card user unaware. To cushion from such shocks, we’ll give you a low-down on all Credit Card charges (because we’re nice like that).
Interest Charges – Annualized Percentage Rates (APRs) / Interest Rates / Finance Charges
The APR of a Credit Card is the interest rate expressed as an annual rate. Also known as finance charges, these rates can be as high as 30% to 50% p.a., beating Personal Loan rates which go up to 20% – 25% p.a. Interest is charged on overdue balances, cash withdrawals, or under other circumstances as laid out in the Credit Card terms and conditions manual. Interest on outstanding dues is often calculated on a daily compounding basis. For e.g. an APR of 24% means interest chargeable at 24% per annum, which translates to 2% a month or 0.065% a day.
How is interest calculated on a Credit Card?
Let’s consider a cardholder whose:
- Billing date is April 30th
- Due date is May 21st
- Bill amount Rs. 1,00,000
…And who misses paying the bill on the due date.
The bill is in overdue state and interest will be charged from May 22nd onwards until the overdue amount paid in full. Now, in the subsequent billing period of April 30th to May 30th, let’s consider that the cardholder has spent Rs. 50,000. Now, his total amount due as of May 30th will now be Rs.50,000 + outstanding balance of Rs.1,00,000 from the last billing cycle + Rs.650 (approx.) of interest accrued on the outstanding balance.
Therefore, the total amount due would equal Rs. 1,50,650.
If the due date for this amount is June 21st then:
Scenario 1: The cardholder pays the outstanding amount of Rs.1,00,000 and the interest accrued thereon of Rs. 650 i.e. Rs. 1,00,650 on bill date May 30th.
The overdue balance will be cleared and interest will no longer be charged. The cardholder will then only have to pay Rs. 50,000 of the current bill by the due date i.e. June 21st. If he does so, there will no amounts overdue or carried forward to the next bill.
Scenario 2: The cardholder pays the outstanding amount of Rs. 1,00,000 and the interest accrued thereon of Rs. 650 i.e. Rs. 1,00,650 on the due date 21st June i.e. one month after it became overdue.
In this case, his outstanding balance will be cleared but he will find in the next month’s bill i.e. on June 30th, an amount of Rs. 1,500 (approx.) as interest charges due.
This is because the grace period or interest-free period applies only to the current balance of Rs. 50,000 and not to outstanding dues. Interest on Rs. 1,00,000 continues to be calculated even during subsequent bills’ grace periods.
Here, interest calculations began on 22nd May when Rs. 1,00,000 became overdue and continued to be charged on a compounding basis until it was paid off on 21st June. Interest is calculated for 30 days because it took 30 days to pay off the outstanding amount.
Interest accrued during the billing cycle ending May 30th was reflected in the bill on May 30th. The remainder interest is accrued during the next billing cycle and hence is reflected in the June 30th bill.
Scenario 3: The cardholder pays the overdue balance before the next bill date, say on 23rd May.
In this case, interest will be calculated only for the 2 days it was overdue. The total interest payable will be Rs. 130 (approx.). If the cardholder pays off the outstanding and the interest on 23rd May i.e. Rs. 1,00,130, then the overdue balance will be cleared and the subsequent bill will show only the current balance of Rs. 50,000.
Bill date vs. Due date: Most customers don’t realise that the interest recorded for billing purposes is not the same as the interest calculated for payment purposes. Credit Card issuers often reap benefits in the form of high interest payments due to miscalculation on part of the card owners. Interest should always be calculated from the date the amount became overdue to the date the overdue amount was paid off, irrespective of billing dates.
Credit scores and Credit Card interest rates: Customers who have poor creditworthiness, i.e. a low credit score, may find their Credit Cards carry a higher APR than those with strong creditworthiness. This is to make up for the risk of non-payment posed by a less creditworthy customer.
Promotional or teaser rates: Many Credit Card providers market low APRs/ interest rates to new customers or balance-transfer customers to promote their cards. These are ‘introductory offers’ and the low rates are referred to as ‘Teaser Rates’. They are called so because these low rates are only offered for a limited period of time, say 6 months to a year. After the offer runs out, normal interest rates/ APRs are applicable and are usually considerably higher than the promotional rate.
Interest rates on Credit Card cash withdrawals: APRs are also applicable on cash withdrawal/ advances made using a credit card. Interest is charged on the amount withdrawn; again usually on a compounding basis. It is calculated from the date of withdrawal until the date of repayment. Credit Card cash withdrawals can be done at the ATM just like with a Debit Card. APRs can vary depending for service to service. For e.g. for a certain card, the APR on overdue balances may be higher than on cash withdrawals.
Credit Card rates vs. Personal Loan rates: The APR on most Credit Cards is higher than the interest rate charged on a Personal Loan. Non-payment of Credit Card dues over a long period of time is like availing a Personal Loan at an exorbitant rate of interest. If a cardholder needs credit for a long period of time, he/she would be better off taking a Personal Loan.
Keep in mind, a Credit Card must only be used to purchase affordable items and services, and dues must be paid off immediately or at the soonest. Likewise, the cash withdrawal facility on a Credit Card must be availed only in case of emergencies. Cash withdrawals are loans given at high rates of interest. So be very careful when withdrawing cash from your Credit Card.
Non-Interest Costs, Fees and Charges
This includes all non-interest charges applicable on a Credit Card. These costs vary depending on the type of card being used. Non-interest charges could be 1 – 2% of outstanding dues or a flat charge of nominal values of about Rs. 100 – Rs. 200. They are not as high as interest/finance charges but add to the total amount due. These costs and their applicability are listed out in the terms and conditions of a Credit Card agreement. That’s why we say it again and again – read the terms and conditions (just like your mama told you). Now let’s look at the non-interest fees and charges.
Annual Fee: This is a yearly fee charged by Credit Card providers for issuing a card. Many, but not all, Credit Cards feature annual fees. Some card providers waive annual fees either as temporary promotional offers or as a ‘lifetime-free’ offer. Often, Credit cards that offer premium services or features boast an annual fee. In some cases, card providers offer annual fee waivers or reversals if cardholders spend a minimum amount within a pre-decided timeframe (usually a year). Some Credit Card providers do not charge an annual fee in the first year after issuing a card. They instead charge a joining fee, which is higher than the annual fee. However, the annual fee is charged from the subsequent year onwards – there’s no running away from this one.
Again, some providers offer to reverse the joining fees if a minimum amount is spent using the card during the first few months of its issue. Annual fee is directly charged to your Credit Card account, generally on an annual basis or, if the provider specifies, on a monthly basis. Annual fee can be increased with prior notice.
Renewal Fee: When a Credit Card is due to expire the cardholder can renew it by paying a renewal charge.
Late Fee: A late fee is levied when Credit Card dues remain unpaid beyond the due date. Just by paying the minimum amount, the late fee is not waived. Late fee is separate from interest charged on the outstanding due. Late fee is not levied if the bill payment is made on or before the bill date. Late fee is calculated depending on the total amount outstanding – higher the overdue balance, higher the late fee. Late fee can either be a fixed amount or a percentage of the outstanding amount, depending on the card issuer.
Over-the-Limit Fee: This charges comes into force when a cardholder exceeds the credit limit on a card. It is calculated as a percentage of the amount spent in excess of the credit limit.
Transaction Fee: Cash withdrawals made using a Credit Card attract a fat transaction fee. It is a calculated as a percentage of the transaction amount, or as a standard amount. It is charged on a per-transaction basis. If at all you must withdraw cash using your Credit Card, withdraw a lump sum rather than tiny sums.
Taxes: Taxes, as applicable, are charged and added to the bill amount. Common taxes payable on Credit Cards are service tax and Swachh Bharat Cess.
Duplicate Statement Fee: Credit Card statements are generated and sent out to customers before the bill due date. If for some reason the customer wants a duplicate copy of the bill the same can be obtained from the card provider for a nominal fee.
Forex Fee: Transactions made in a foreign currency are converted to INR before being billed for the credit statement. Forex fee is charged for converting transactions amount from a foreign currency to INR. This conversion takes place either at a fixed amount or at a percentage of the transaction value.
Cheque Bounce Fee / Outstation Cheque Fee: Card issuers usually charge a fee to process credit card payments made through outstation cheques. Card issuer can charge a fee for cheque bounces.
ECS / Auto-Debit Return Fee: Similar to cheque bounce fee, if ECS payments do not go through, a fee is charged for the miss.
Upgradation Fee: The cardholder can upgrade their Credit Card plan by paying for it. The upgraded plan would provide enhanced benefits for which an upgradation fee is levied.
Balance Transfer Fee: A one-time balance transfer fee is charged to transfer the outstanding balance of one Credit Card to another.
Supplementary Card Fee: You have to pay a fee if you wish to procure add-on cards or supplementary cards for your family as extension of your primary Credit Card.
Redemption Fee: Most providers charge a nominal fee when customers redeem cash-backs or rewards earned on their Credit Card.
Uncapping of flier miles Fee: Many providers limit the number of flier miles that can be accumulated on a card. In order to uncap this i.e. in order to allow more miles to be added to the card, beyond the prescribed limit, a flat fee will have to be paid.
Cash payment Fee: This is a nominal charge levied for Credit Card bills paid in cash.
Card Replacement Fee: In the event a card is lost or stolen, you’ll have to pay a fee to get a new card.
Surcharges: A surcharge is levied for the privilege of using a Credit Card i.e. an extra charge for making payments with a Credit Card. This charge won’t be applicable if the payment is made in cash. In India, surcharge is commonly levied on railway ticket booking and at fuel pumps. This fee is levied as a percentage of the transaction value subject to a minimum amount payable. Some providers offer surcharge waivers subject to terms and conditions.
Convenience Fee: This is an amount charged for making certain payments via a Credit Card as opposed to other modes like cheque. For e.g. utility bills can be paid via Credit Cards if registered to it. But you must pay a convenience fee to avail of the service.
All About Credit Card Validity
(What’s the lifespan of your Credit Card?)
Credit Cards are issued with a specified validity period i.e. they can only be used from the date of issue until the date of expiry. You won’t be able to make transactions using an expired card – that’s sort of a no-brainer, isn’t it? Credit Cards come embossed with card expiry dates along with other details such as the card holder’s name. Credit Card validity detail is a key bit of information that must not be divulged, unless to make online transactions through a secure portal (psst, look for ‘https’ in the URL).
‘Valid-from’ – Issue Date: This specifies the month and year from which the Credit Card is valid. Many cards do not provide this date on the card.
‘Valid-Unto’ – Expiry Date: This specifies the month and year until which the Credit Card is valid. This detail is found on all Credit Cards, usually embossed in the ‘MM/YY’ format as per ISO standards. Usually, cards are valid until the last day of the month of expiry. As a card approaches expiry, cardholders can decide whether to renew it or let it lapse.
Cancelling or Closing a card: You may, at any time, decide to cancel or close your Credit Card. This can be done by intimating the card issuer. However, the card will only be cancelled or closed once all outstanding dues are paid. This includes all the pending interest charges and fees. Soon after closing or cancelling the Credit Card, most people cut their cards in half. This is done to prevent it from being misused by others. However, simply destroying a Credit Card physically does not eliminate the need to pay outstanding dues on the card. It will still be considered active, and interest (if applicable), will continue to accrue on the card.
Due consideration should also be given to the impact of cancelling or closing a Credit Card. This will impact your Credit Score. A cancelled or closed card is no longer valid even if the expiry date has not yet been crossed. All transactions on a cancelled card will be denied. You cannot build a Credit Score in the absence of credit transactions.
Credit Card Security
(How to keep your card safe and sound?)
What is a Credit Card Number?
All Credit Cards bear a number unique to them. This is done to identify one card from another. As a norm, Credit Card numbers are about 15 or 16 digits long. The numbers follow the ANSI Standard X4.13-1983 and Luhn system. What does this mean? Each Credit Card number, through use of an algorithm, adds up to a multiple of 10. Any other combination of numbers is invalid. The number of your Credit Card is a code used to denote the Credit Card company (VISA, Mastercard, AMEX etc.) the type of card (travel, dining etc.), prime currency, bank number, account number and check digits. The way the numbers are grouped together to represent this information may vary between companies.
Usually, the first or first two digits, known as the Major Industry Identifier (MII) number, are used to identify the Credit Card company. If 4 is the first digit then it’s a VISA card, 5 stands for MasterCard and 37 for AMEX and 38 for Diners Club. The next few digits are the Issuer Identification Number (IIN) or the Bank Identification Number (BIN), followed by the account number. Usually, the last digit or two make up check digit(s) used as a security/verification number. The number of digits used to indicate the bank account and check numbers vary depending on the Credit Card company. An example of a VISA card number structure is 4000 0807 0620 0002 where, 4 = MII or Credit Card Issuer, VISA; 4000 08 = IIN or Bank Number; 07 0620 000 = Account Number; 2 = Check Digit.
What is a CVV number on a Credit Card?
The CVV (Card Verification Value) is a three-digit number found on the back of a Credit Card (four-digit number on the front of the card in case of AMEX cards). It is used for verification purposes, mostly for online transactions and other transactions where the card cannot be physically processed. The aim of assigning a CVV number to each Credit Card is to prevent fraud or misuse of the card. For online transactions, a CVV number must be provided within a certain timeframe. This helps verify that the user has the card in his/her presence. The CVV number functions like a code that verifies the Credit Card details of the card holders, such as name, number and validity dates. Commonly known as the CVV number, it is also known as CVV2, CVC2, and CID depending on whether it’s a VISA, Mastercard or AMEX card.
Magnetic Strips, Smart Cards (EMV chip and PIN enabled cards) and Hybrid Cards
Credit Cards come equipped with a magnetic strip. You can find a black colour strip on the reverse side of the card. This strip is home to all information about your card and its holder viz. the card number, cardholder’s name, expiry date and other important details. When the card is swiped through a magnetic card reader, this information is read to process transactions. This process gave rise to the common phrase ‘swipe a card’.
However, in order to make Credit Cards more secure, they are now being issued with embedded smart-card chips. These chips contain and transmit all required information using encryption codes. Instead of ‘swiping’ a card, it is now fed into a chip reader. To validate the card, the cardholder has to enter the corresponding PIN.
Currently, in India, not all merchants are equipped with PoS terminals that can read chip-enabled cards and, as such, Credit Cards still feature the magnetic stripe, although embedded with a smart chip. These hybrid cards can both be swiped or inserted into chip-readable machines. Card issuers in India are aiming to steadily phase out magnetic-strip cards in favour of EMV chip and PIN cards. In most countries outside India, the ATM PIN will have to be entered to verify a transaction. However, in India (and a few other countries), the Credit Card PIN can be used to validate a transaction.
Credit Card Fraud – Stolen or Lost Cards
Fraudulent use of a Credit Card can occur when a card is stolen or a person is wrongfully in possession of somebody else’s Credit Card details. Credit Card fraud can also occur through identity theft, whereby unscrupulous parties obtain a cardholder’s personal and card-related information wrongfully.
Blocking a Credit Card
In the event that a Credit Card is stolen or lost, you must immediately block it. You can do this by calling the issuing bank’s customer-care service. You will have to provide Credit Card details in order for your card to be blocked. In case you don’t remember the details, provide your personal information like your name and DOB to verify your identity.
How long before the blocking request is accepted?
Bankers take immediate action on card-block requests. As soon as a card is blocked, all transactions attempted through the card will be denied. In many cases, since cardholders don’t realise the loss or theft of their card immediately, all transactions carried out on blocked cards for up to 2 days prior to blocking are voided (subject to individual issuer’s guidelines).
With identity theft becoming increasingly common, a card owner in physical possession of his/her credit card can also be subject to Credit Card fraud. By obtaining vital Credit Card details—card number, CVV number, name of the cardholder, validity dates and PINs—fraudsters can execute unauthorised online Credit Card transactions. Hence, Credit Card holders must keep their cards carefully, making sure that they don’t fall victim to the tricks of fraudster.
Fraudsters often pose as representatives of the issuing bank and then solicit all information from gullible cardholders. Don’t be gullible, be smart. Banks will never ask you to divulge your card details.
Cardholders can also request to have their Credit Card blocked if they wish to discontinue use of their card. This applies to add-on cards as well.
Credit Card Protection and Insurance
Credit Cards must be protected against fraud, misuse, loss, theft, damage or other unfortunate events through card protection plans. You can obtain a card protection plan from the card lender. Banks often pair a protection plan with a Credit Card before giving it to customers. If not, then cardholders can request one separately.
Many Credit Cards issuers offer in-built protection schemes like those that protect customers against fraudulent spends made on stolen or lost cards, or bundled insurance covers against loss or theft of a card. Insurance can also be bought separately by the cardholder from a general insurance company to cover loss, theft, or fraudulent misuse of their Credit Card.
Agencies like OneAssist and CPP India provide identity protection plans. They cover transactions made on a lost card which could not be blocked in time. While some cards offer protection at no extra cost, most schemes come at an additional fee or premium.
Types Of Credit Card
With the Credit Card basics covered, it’s time to power yourself with one. But then there are a zillion cards up for grabs. How do you know which one is your plastic soulmate? Let’s look at the different categories of Credit Card.
Types of Credit Cards
There are different categories of Credit Cards issued by card providers. Credit Cards are issued for general purpose spending and as well as customised spending e.g. dining cards, fuel cards, travel cards, shopping cards, retail cards etc. The kind of card that a customer can avail depends on his/her creditworthiness and eligibility for the card. Cards packed with features and offers come at a higher cost than standard Credit Cards.
Standard Credit Cards
These are used for general purpose spending and generally don’t feature any frill benefits, premium services, or added features. However, even with standard Credit Cards, there will be differences in features. The more features a card boasts, the higher the cost of getting one.
Premium Credit Cards
Premium cards sit at the upper end of the Credit Card coolness scale. These cards come packed with features and benefits like specialised concierge facilities, access to restricted airport lounges, and a higher credit limits. A general purpose premium card comes in three variants – “Silver” “Gold” and “Platinum”. Each variant is a step-up from the preceding variant with more fun packed into it.
Rewards, Points, and Cashback Cards
These cards offers benefits on each purchase or on a certain kind of purchase. Commonly issued cards under this category are Dining Cards, Travel Cards, Entertainment Cards, Utility Cards, Shopping or Retail Cards, Fuel Cards, Grocery Cards, Wellness Cards, and the list goes on. These cards try to maximise spends of a certain kind. E.g. a dining card that offers discounts at restaurants, a travel card that allots points for every rupee spent on tickets or hotel bookings, or a shopping card which promises cash credits for spends made at certain retail stores. Customers can opt for the kind of card that best suits their spending needs.
A person who travels frequently would opt for a Travel Card to accumulate flier miles, which can then be used to pay for subsequent ticket purchases. A movie buff can opt for an Entertainment Card that offers free tickets at certain theatres.
Secured Credit Cards
Some banks and financial institutions offer customers secured Credit Cards. These are made available against the security of a fixed deposit. Secured Credit Cards are usually offered to customers who have a poor credit history or a low credit score. Credit limits on secured Credit Cards can go as high as 80% of the deposit amount. In case of late / non-payment of dues, issuing banks recover the outstanding balances (including interest and other charges) from the cardholder’s deposit. Cardholders can beef up their Credit Score by using their secured Credit Card responsibly. Eventually, customers with proven creditworthiness may be allowed to switch to unsecured/regular Credit Cards.
Primary/Secondary/Add-on Credit Cards
Many issuers allow cardholders to extend benefits of their card to close family members by applying for add-on Credit Cards. In this case, a customer’s card is termed as the ‘primary’ card and the additional cards issued to his/her family members are called ‘add-on’ or ‘secondary’ or ‘supplementary’ Credit Cards. The credit limit on the primary card is shared with the secondary cards, or sub-limits are set for each add-on card. Secondary cardholders use their Credit Card the same way as the primary cardholder. A common statement is generated for all cards and overdue amounts on any of the cards will reflect in the statement.
Interest and other charges on secondary cards is applicable as on the primary card. Keep in mind, banks can limit the number of additional cards a primary card holder can opt for. For instance, Axis Bank offers up to four add-on cards. Add-on Credit Cards may or may not be issued for an extra charge, depending on the bank. KYC norms have to be adhered to for every add-on card issued.
Check This: Advantages Of A Second Credit Card
Special-purpose Credit Cards or Segmented Cards
These are issued for a specific class of customers e.g. students or business people or corporates. They are structured so as to suit the financial position and nature of spends of such customers. E.g. a student may not be allowed a high credit limit, while a business person may receive customised billing statements. Students may not exhibit a need for high credit but may use the card for frequent, low-value spends in order to build his/her credit history. Corporates may issue cards to employees with set credit limits for official expenses. Features and benefits of these special purpose cards vary depending on the target customer-class.
White-labelled Credit Cards
These are Credit Cards issued by banks or institutions backed by banks that handle the servicing / back-office operations of Credit Card accounts. For e.g. a non-banking financial company (NBFC) may launch a Credit Card, but customer servicing or back-end operations will be done by a collaborating bank.
Co-brand Credit Cards
These are Credit Cards that are developed jointly between a Credit Card company/association and a merchant. Although these cards can be used as a regular Credit Card, they feature specific benefits for spends made at the co-sponsoring merchant. The brand of the co-sponsoring merchant is featured on the card. Merchants may offer discounts or other incentives as a way to boost sales through use of such cards.
Domestic and International Credit Cards
Domestic Credit Cards are those that are issued for use only in India i.e. they will be accepted and honoured for purchases made at registered outlets/vendors in India. International cards are those that are issued for use outside India as well. International transactions, which are done in a foreign currency, are converted into Indian Rupees (INR) based on a specific exchange rate. The date of conversion i.e. the settlement date, may not be the same as the date of the transaction.
Credit Card Companies in India
Credit card issuers in India are predominantly banks. Some popular Credit Cards issuing banks are:
- ICICI Bank
How To Choose The Right Credit Card
(Finding your Credit Card soulmate)
The Credit Card industry in India has evolved rapidly over the last couple of decades. Where Credit Cards were once looked upon with doubt and trepidation, they are now considered a must-have personal financial instrument by an increasingly financially savvy Indian population. This has encouraged Credit Card providers to get creative with their card offerings. Given the plethora of options available to the average customer today there are a number of factors one must consider before choosing a Credit Card. Here are some of the parameters you can consider when applying for a card:
Check card eligibility: Credit Cards are issued to customers based on various parameters or eligibility criteria. Only those applicants who satisfy a card’s qualifying requirements can obtain it. General eligibility requirements demands customers to be over 18 or 21 years of age, have adequate and sustainable income, and have a good Credit Ccore. Always check the eligibility criteria. If you meet them, then you know that your chances of getting a Credit Card are more on the positive side.
Ascertain affordability / cost: The cost structure of a Credit Card varies, inter alia, on card type, its features and benefits, the card issuer, and card usage by the customer. When choosing a Credit Card, you will have to note the fees and charges associated with the card and assess your ability to service both interest and non-interest costs. In many cases, cards with attractive features and benefits will attract higher interest charges or annual fees. Avoid falling for teaser rates on Credit Cards i.e. low introductory interest rates or fee waivers. These are often offered for a limited time period after which regular rates apply.
Compare card types: Credit Cards should be chosen depending on the purpose of use. A general-purpose card is suitable for customers who have no particular pattern of spending and require it for ad-hoc purchases. But for customers, who wish to optimise certain types of spends, special-purpose cards e.g. dining cards or travel cards would be more useful. In some cases, customers may want specific features such as high credit limits or premier services which are available on premier cards. Exclusive cards are made available to certain customers on special invitation from the card issuer.
Understand card usage: A card applicant must also consider whether he/she will be using the card more on international travels or domestically.
Consider additional features: Consider value-added features in a Credit Card before saying, yes. This includes options such as balance transfers, add-on cards, payments in EMIs, concierge services etc.
Find out about rewards, offers, deals and discounts: Consider the types of rewards and deals offered on a Credit Card. Cashbacks, usage-based fee waivers, deals on certain kinds of purchases or discounts at various outlets can add value to a Credit Card over and above its regular offerings.
Compare card issuers: Leading card issuers usually offer a wider range of Credit Cards, schemes and offers to choose from. Besides providing a Credit Card, it is advisable to avail Credit Cards from issuers who provide add-on, value-added services. Leading card issuers tend to have superior customer care services, easy application processes, and better deals and rewards programs.
Determine card acceptance: It is important to choose a Credit Card that is popularly accepted in the market. Visa and MasterCard are two leading card associations whose Credit Cards are accepted globally. They have a strong network of issuing and acquiring banks and are generally accepted by all vendors who accept Credit Card payments. AmEx, on the other hand, is not as popular in India and is not widely accepted.
Credit Card Application And Issue Process
(The long and short of it)
If your paperwork is in place and you meet the eligibility criteria, then the process of getting a Credit Card will be hassle-free.
The overall application and issue process for a Credit Card involves the following stages –
- Review and verification
One should apply for a Credit Card only after comparing the various Credit Card offerings and providers in the market. The application process for a Credit Card depends on the type of Credit Card and card issuer chosen. The application process, though broadly similar across all banks, may differ between individual providers in terms of eligibility requirements, documentation, mode of application etc. In general, applying for a Credit Card requires:
- Satisfying a set of eligibility criteria as laid out by the card issuer
- Submission of an application form
- Providing supporting documentation to process the application
- Payment of upfront fees, where applicable
Online and Offline Application
Applying for a Credit Card can be done either online or by visiting the bank.
Physical (Offline) process: The traditional (and long-winded) way to obtain an application form is by visiting the card issuer’s office / branch and obtaining a physical copy of the form. On filling the form, the same has to be submitted at the issuer’s office / branch, along with the required documents. However, in order to increase presence and reach, many banks have extended their physical locations, such as setting up kiosks, where applicants can apply for a card at their convenience. Many times, applicants express their interest to apply for a card over the phone. The banks then send personnel over to the house of the customer with the required forms.
Many workplaces, offices etc. conduct drives or allow bank agents to contact interested customers i.e. employees of the workplace. In this case, applications are filled by hand and handed over with relevant documentation to the agent, making it more convenient than visiting the issuing bank’s branch.
Online: Almost all Credit Card issuers have online platforms through which applicants can apply for Credit Cards. Applicants can log into the issuer’s website and download/fill the application form. Documents can be submitted subsequently. Alternatively, issuers/ banks send personnel to collect documents and other paperwork from online applicants, eliminating the need for the applicant to visit the bank altogether.
Besides card issuers, there are a number of independent financial services websites which provide an online platform for Credit Card applications. Ahem! One of them is us (BankBazaar.com). Online applications are made easy with services such as instant e-approvals and quicker processing and dispatch of cards.
Review and verification
On submitting the application, the card issuer reviews the information provided by the applicant. At this stage, the card issuer can request for additional details. Once the information is verified, the application moves to the assessment stage.
If all the information provided in the application is in order, the issuer then proceeds to assess the applicant’s creditworthiness. This involves a study of the applicant’s credit history and scores. Most card issuers extract the applicant’s credit information through CIBIL or other leading credit information bureaus. Issuers also study the applicant’s income, employment and residential status to ascertain his/her ability to service payments. A high credit score is usually indicative of strong past credit behaviour and stable employment. Banks also consider the customer’s existing relationship with the bank.
If satisfied, the bank then approves the application and issues a Credit Card to the applicant. Remember to read the term and conditions before saying, yes. Credit Card terms and conditions (T&C) are an important part of the agreement. Often overlooked by most Credit Card customers, the T&C outlines all major rules governing the Credit Card issued. This includes the fees, charges and interest rates applicable on the card, validity, grievances redressal process, customer care information, accepted modes of payment, billing information, card limits, benefits redemption process and a host of other information. Many a times this information is not advertised or provided by the issuer upfront, hence, it’s important to read the fine print.
Once issued the card can either be collected physically from the issuer’s office or may be delivered to the customer by the issuer. The customer receives the card with all pertinent information, such as PINs and other codes.
Eligibility – Who Can Get A Credit Card?
(Do you make the cut?)
A Credit Card is basically a line of credit or a kind of a Personal Loan given to an individual. Every time a Credit Card is issued, it’s a risk taken on by the card issuer. Hence, though widely available to a large number of people, not everyone can avail a Credit Card. There are certain limitation imposed regarding who can apply for a Credit Card.
The eligibility criteria varies with each bank and according to the type of card chosen. In general, however, to get a Credit Card an applicant should satisfy the following criteria:
- Minimum age: 18 – 21 years; Maximum age: 60 – 65 years
- Minimum income: Rs.1.5 lakhs – Rs.5 lakhs p.a.
- Stable employment/source of income: Salaried/Self-employed/Professional
- Credit Score: 700 above (CIBIL score) or proven record of creditworthiness
- Residence status: Resident of India
Eligibility criteria also vary depending on the category of applicants. For e.g. self-employed individuals are considered riskier than salaried individuals.
A customer should always apply for a Credit Card only after checking the eligibility criteria for that card. Rejection of Credit Card applications will lead to a hit on the credit rating of the applicant. All Credit Card issuers state their eligibility requirements, and nowadays even feature an online tool called the eligibility calculator for applicant to use. Using this, Credit Card seekers can gauge the cards best for them.
Documentation required for a Credit Card
When applying for a Credit Card, applicants are required to submit a duly filled in application form and provide supporting documentation to corroborate information filled in the application. Applicants are required to satisfy KYC (Know Your Customer) requirements which includes filling up a KYC form and providing the following documents:
- Proof of identity: Driver’s License, Aadhar Card, Copy of Passport, Voter’s ID, PAN, Certificate of Marriage
- Proof of residence/address: Driver’s License, Aadhar Card, Copy of Passport, Voter’s ID, Recent Utility Bill (Telephone, Electric, Gas, Post-Paid Mobile, Water), Property Tax Receipt, Bank Statement, Pension Pay Orders (PPOs)
- Recent photograph
Keep in mind, Credit Card issuers may seek additional documents if required.
Applicants will also have to submit proof of income as per the issuer’s requirements. This depends on the applicant’s employment type. Generally:
- Salaried applicants: Latest salary slips, Form 16, Employment Letter
- Self-Employed applicants/ Professionals: Latest Income Tax Returns, Audited financial statements, Business Continuity certificate
The documents should be valid at the time of the application. Documentation is important for issuers to ascertain the true identity of the applicant and to prevent fraud and default.
Credit Card Management
(The management is not responsible for your belongings)
If you are getting a Credit Card, you must know that it will influence your Credit Score. This section will explore the relationship between a Credit Card and Credit Score.
Credit Cards and Credit Scores
Credit Card issuers are becoming more wary of defaulters and high-risk profile customers. Before approving and issuing a credit card to an applicant, strict due diligence is undertaken on the applicant’s creditworthiness. This involves referring to the applicants’ credit reports and credit scores. When customers deal with banks and other financial institutions, their credit transactions are reported to the Credit Information Companies (CICs) namely CIBIL, Equifax etc. The CIC records information provided about each borrower and form a credit report. A Credit Score is part of a person’s credit report, which subsequently help lenders evaluate the creditworthiness of an applicant. Credit Score plays a vital role in determining the approval or rejection of a Credit Card application.
What is a Credit Score / CIBIL score?
A credit score is a numeric representation of a person’s credit behaviour. It indicates whether a Credit Card seeker is creditworthy or not i.e. whether he/she is high or low on risk. A high credit score is indicative of the applicant’s card good ability to manage credit and make timely payments. A CIBIL TransUnion Credit Score of 700 to 900 is considered to be very good and gives applicants a strong chance of being approved for a credit card. CIBIL scores below 300 are considered poor and tends to lead to rejection of applications. A high credit score also helps credit card customers obtain favourable rates of interest or APRs and higher credit/cash limits.
What is a Credit Report / CIBIL CIR?
A credit report is a record of a person’s credit history i.e. his/her past credit behaviour over a period of time. It records different lines of credit availed, the amount of credit borrowed, payment frequencies and patterns etc. CIBIL creates Credit Information Reports (CIRs) which details an individual’s credit history for a period of about 7 to 10 years.
How Credit Cards affect credit scores
Credit Utilisation Ratio: This is the amount you spend on your Credit Card vis-a-vis the card’s approved credit limit. Ideally, a 30% utilisation ratio is considered responsible. However, spending as high as 90% of the credit limit is not frowned upon, provided bills are paid in time. Maxing out Credit Cards i.e. 100% utilisation or higher of available credit reflects negatively on cardholders and affects their credit scores similarly.
Inquiries by credit card issuers: When an application for a credit card is made, Credit Card issuers make an inquiry with a credit bureau for the applicant’s credit information. This is noted by the credit bureau as a hard inquiry. (A soft inquiry is one where an individual requests his/her own credit information from the bureau). Frequent and many hard inquiries affect credit scores negatively. Many times, credit card seekers apply at multiple banks without realising the gravity of their act. Multiple inquiries give the impression that the card seeker is not a suitable applicant and is in desperate need of credit.
Rejection of Credit Card applications: Rejected Credit Card applications negatively impact your credit scores. Rejection happens when applicants don’t meet the eligibility requirements of an issuer, or don’t have the documents to back their claim. A bad Credit Score can also lead to rejection of Credit Card application.
Late payments/Defaults: A Credit Card holder’s payment patterns and history is tracked by the issuer and reported to the bureau. Late payments, outstanding dues, and defaults on payments all hurt credit score.
Settling/Writing off dues: When a Credit Card bill remains outstanding for a long period of time, issuers and cardholders resort to settling or writing off the dues. Settlements are reduced, part payments in lieu of the total outstanding bill. Write-offs are waivers of the total outstanding bill by the issuer. In both cases, credit scores are badly impacted since it reflects poor creditworthiness of the cardholder i.e. an inability to repay dues.
Closing/Cancelling credit cards: In a bid to reduce Credit Card usage, many cardholders close or cancel their cards. This too may negatively affect your credit score. All dues should be paid before closing a card.
Credit cards for those with poor credit scores or no credit history
It’s difficult to obtain a Credit Card with a poor credit scores, but not impossible. Those who have never availed a loan or used a credit card will not have any record of credit usage and therefore no credit history at all. This also poses a problem for first-time Credit Card seekers as issuers don’t have anything to go by to assess the applicant’s past credit behaviour. It may also be perceived as an individual’s aversion towards credit and his/her possible inability to manage credit.
However, credit scores, while important, are not the sole determining factor of a Credit Card application approval or rejection. There are issuers who may consider issuing cards to applicants based on proven ability to service credit card dues, stable employment, existing relationship with the bank/issuer and other mitigating factors.
Some options open to those who seek Credit Cards with poor credit ratings and no credit history are:
- Secured Credit Cards: Issued against a fixed deposit held in the customer’s name, where the FD value acts as security.
- Add-on cards: Issued against a primary card held by the customer’s family member, where the primary member is responsible for payments.
- Student cards: Issued to students for the purpose of building credit.
These cards can be used to build or improve credit scores. Once a suitable credit track record is established using such options, cardholders can seek to apply for a regular Credit Card.
Credit Card Dos and Don’t
(Something like the Ten Commandments, but not written in stone)
The following tips on Credit Cards will not only help you build a good Credit Score, but will also help you be a better credit card manager.
Ascertain the need for a credit card: While it’s good to hold a Credit Card for the sake of ease and convenience of carrying out transactions, don’t accumulate too many Credit Cards that will eventually not be used or result in spending more than what you can afford.
Pay your bills on time: Don’t settle for paying the minimum amount due every month in order to clear the bill. Interest continues to accrue on the outstanding amount and can snowball into larger payments due in coming months. Paying the minimum amount due is a common mistake many Credit Card holders make. This eventually lands them in a debt trap i.e. a cycle of debt where borrowers cannot service their dues on time.
Use credit cards for affordable purchases: Don’t use Credit Cards for purchases that cannot be paid for in the subsequent month when the bill comes. Likewise, don’t use Credit Cards for minor, day-to-day purchases of essentials.
Compare cards and card issuers thoroughly before applying for a credit card: Don’t get stuck with a card that does not offer any value-added benefits, or features more costs than benefits. Use the internet. You can visit BankBazaar and compare a host of Credit Cards. Pick a card packed with awesome features.
Read the T&C before signing the agreement: Don’t assume that all Credit Card costs are advertised up front, or that general features of credit cards are common to all issuers. Ask the issuing bank as many questions as you like about the Credit Card and be sure of what you are signing up for.
Check your eligibility requirements before applying: Always check your eligibility and Credit Score before applying for a Credit Card. Applying with a poor Credit Score or lacking on the eligibility requirement will lead to a rejection of your application. What does rejection mean? Well, a dip in your Credit Score.
Check credit scores independently: Don’t rely on Credit Score inquiries to be made by the card issuers. Always check your score before submitting your application. If your score is not good enough, step back and take measures to improve it. Once your score is in the coveted 700s range, apply away!
Opt for auto-debit facilities to pay your Credit Card bill: Are you slightly forgetful and can’t seem to remember the payment due date? Well, opt for the auto-debit facility. The bill due will be automatically debited from your account and you don’t have to worry about overshooting the deadline. This is also a good way to ensure that your Credit Score doesn’t get hurt by a delay in making payments. Just make sure that the auto debit account has the cash needed to make payments. Lack of payments will lead to a default.
Evaluate your credit card bills regularly: Don’t just look at the total amount due in your Credit Card statement. Look at all the tiny expenses that together make up the big sum. Sometimes, you might spot unexplained spends. Don’t let these pass. Issuers can make an error too. After all, they’re only human too, no? On another note, false expenditure can also indicate fraudulent use of your Credit Card. This applies to purchases made through add-on cards as well.
Keep credit card information and personal details safe – Don’t divulge your Credit Card details to anyone (we are sure, you are smarter than that!). Reveal your card details out aloud or punch in your PIN in full view of everyone and soon, indications of misuse will surface in your Credit Card statement. Your card details are to be kept to yourself. Even the issuing banks won’t ask for it.
We hope you understand Credit Cards more closely now. A true test of your learning will be when you successfully implement or follow all the guidelines mentioned in this handbook. So, while all that you have learnt is still fresh in your memory, apply for a Credit Card. We will surprise you with the number of them we have on offer, especially tailored to fit your wallet.