Credit cards in India are a type of unsecured borrowings which is granted by a bank or credit card company that agrees to offer the user a predefined credit limit. With credit cards, users can make transactions within the credit limit and repay them on the due date. credit cards come with a revolving credit account which is different from personal loans or car loans that are primarily instalment loans accounts. This allows users to repeatedly borrow additional funds on the same account as they continue to pay the dues.
How Does A Credit Card Work In India?
As stated above, a credit card allows users to borrow money within the credit limit and repay it within the due date. When a credit card user makes a purchase, the amount gets deducted from the available credit limit and when he/she pays it back, the payment is added back to the total credit limit. This allows users to have regular access to credit within the credit limit.
However, if one does not pay the credit card bills in full, the credit card issuer may charge interest or finance fees on the unpaid amount. This amount continues to accrue until the bills are paid off completely.
Additional read – Best secured credit cards to rebuild credit
How Do Credit Card Transactions Work?
After having understood the basic functionality of a credit card, it is important to know how credit card transactions work and what exactly happens at the time of swiping a card using a POS machine.
1) Which Parties Are Involved In A Credit Card Transaction?
Here are the main parties involved in the entire credit card transaction process:
- Merchant- The merchant is the business owner at whose establishment a purchase is made
- Acquirer bank- This is the merchant’s bank
- Network- This is required to facilitate the transaction, common ones being Visa or Mastercard
- Issuer Bank- The bank that provides users with the credit card is known as the issuer bank
2) How Does A Credit Card Work In Online Transactions?
When a user uses a credit card for purchasing something online, an e-commerce merchant will require the below-mentioned information-
- Credit card number
- Expiry date and CVV of the card
- Name of the cardholder
- Billing information
When a card user clicks on the ‘Pay’ option, the information is sent to your bank via a payment gateway. The banks will send an OTP to your registered mobile number or email id for authentication. On providing the correct OTP, the transaction will be completed.
What Are The Benefits And Disadvantages Of Using A Credit Card?
Here are some of the benefits and disadvantages of using a credit card:
- A credit card user does not have to worry about carrying lots of cash at all times
- Increased purchasing power due to higher credit limit available on most cards
- Most major establishments across the country accept credit cards
- Credit cardholders can also make purchases online
- Especially beneficial for those who frequently travel abroad
- Can result in uncontrolled spending and a poor financial situation if not monitored
- Credit cards are prone to online thefts and frauds
- Credit cards come with high-interest rates and other fees. So, if the payments are not made within the due date, one can end up paying much more than the cost of the product or service purchased
What Are The Charges Involved In Using A Credit Card?
Some of the commonly applicable charges on credit cards are:
- Interest rates: Most credit card issuers charge about 30% p.a or 2.79% to 3.9% per month on credit card dues. These can go up to 45% in some cases.
- Late payment charges: Credit card issuers may charge Rs. 350 per month on outstanding balances below Rs. 10,000. Outstanding balances in the range of Rs. 10,000 to Rs. 20,000 may attract charges of Rs. 500 going up to Rs. 600 for higher amounts.
- Overdraft fees: There is a fee for exceeding the credit limit. This can vary across issuers.
- Overdue: For overdue payments, issuers may send executives to the customer for recovery and charge fees of Rs. 50 to Rs. 75 to the customer.
- Cash advance: If a cardholder makes ATM withdrawals, there is a fee of 3% on the amount withdrawn or Rs. 300, whichever is higher. If money is drawn through a branch, issuers may levy an additional fee of Rs. 500.
- Joining and annual fees: Many credit cards do not have joining charges. However, there could be annual fees attached to the cards.
- Duplicate statement fees: Many banks may charge Rs. 25 to Rs. 200 for duplicate statement requests.
A smart credit card user in India can benefit from various features of credit cards such as cashback, points on shopping, loyalty programmes, etc.
Credit cards, if not used judiciously, can quickly turn into a debt burden. Therefore, users must ask themselves whether there is a need to buy using the card and are there any other better alternatives for the same.