Credit cards have been the most preferred mode of payment for both online and offline purchases. Irrespective of an individual being a businessman or a salaried professional, people of all age groups choose to pay with a credit card as it comes with a number of rewards. Rewards begin at the stage of application through purchase. It also takes precedence as it gives a window for repayment. Here is a detailed explanation of what a credit card is and its actual workflow.

1. What is a credit card?

A credit card is a thin rectangular plastic card issued by a financial institution. It allows a cardholder to borrow funds to pay for the purchase of goods and services. The cardholder must pay the borrowed money, with interest, to the financial institution along with any agreed-upon charges.

It is also possible that the financial institution will provide a line of credit so the cardholder can borrow money in the form of cash advances. However, issuers will set a borrowing limit based on the cardholder’s income level. Credit cards are considered the most popular payment method in today’s world.

2. How to apply for a credit card?

Step 1: Visit the credit cards page on the website of the bank you are considering to get a credit card from.
Step 2: Read through the benefits and features of cards listed to choose the right credit card you wish to apply for from the available list.
Step 3: Go through the eligibility criteria associated with the card and verify if you satisfy them all.
Step 4: If you think you satisfy the criteria, go ahead and click on the ‘Apply Now’ button next to the card’s description on the bank’s website.
Step 5: In the application form, fill up all the necessary details.
Step 6: Attach a copy of all the necessary supporting documents while applying.
Step 7: The bank will process the application and get in touch with you on the status.

3. How does a credit card work?

A credit card is a line of credit offered to a cardholder by a bank or a financial services company. Credit cardholders can make purchases using the given credit without having to pay fully for the purchase with cash instantly.

The charges made to the card will accrue as a balance to be paid off every month or based on the billing cycle. The buyer gets more time to arrange for cash to pay off the balance. The maximum line of credit allowed, credit limit, is determined based on the customer’s credit history and income.

If the customer pays off the statement balance in full every month, the customer’s credit score increases, leading to better chances of getting a bigger loan. Also, every transaction made with a credit card will be capable of earning some rewards.

In contrast, if the customer fails to pay the statement balance on time, the unpaid balance will accrue interest. The interest charged on the unpaid balance is considered higher as compared to other loan types. In this case, late payment fees will be applicable in addition to the interest rate. It may harm the individual’s credit score.

4. Features and benefits of credit cards

Here is a list of the features and benefits of using credit cards:

• Easier, compact payment method as compared to carrying cash.
• Make instant payment for your purchases with a credit card.
• Payment through credit card is globally accepted.
• Credit cards come with a balance transfer facility where you can transfer the outstanding balance of one card to another with a lower interest rate.
• Enjoy interest-free period where you can pay the balance without interest charges.
• Make partial payments to skip paying the entire outstanding balance at once.
• Utilise the EMI option where you can make equal monthly instalments for your purchase.
• Earn reward points, cashback, flyer miles, welcome and other privileges upon every rupee spent with the credit card.
• Access to exclusive privileges to premiere events such as complimentary tickets.
• Few cards provide travel insurance when you travel abroad.
• Responsible repayment behaviour can build your credit history and, in turn, credit score.

5. What is credit card limit?

Credit card limit or the credit limit is the purchase limit allowed on a credit card as set by the bank or financial institution. The term ‘limit’ means the maximum amount you can spend with your card.

The limit is usually determined based on the customer’s monthly income and credit history. There may be other criteria to set the credit limit based on the bank you are dealing with. You can request for an increase/decrease in the limit based on a change in your income or liability.

6. How to pay a credit card bill?

There are several methods to pay a credit card bill, such as:

• Internet banking – NEFT/RTGS: If you have registered for internet banking and have a savings account with the same bank that has issued the card, you can make the bill payment with ease. Internet banking works even if you don’t have a savings account with the same bank.
  You can log into your account on the internet banking page and transfer funds to the credit card account as any other funds transfer. Based on the amount to be transferred and the time taken for the money to be credited, you can choose between NEFT and RTGS.
• BillDesk: BillDesk is an online payment platform that allows you to make credit card bill payments even if you do not have an online account. Many banks support the use of this platform for easy and convenient bill payments. You can use a debit card or net banking accounts of partner banks to pay credit card bills.
• Auto-debit facility: Through the net banking feature of your savings account, you can choose to subscribe for the auto-debit facility so that you can rest assured that the credit card bills will be taken care of. You can set standard instructions to debit the credit card bill on the same day every month. The amount can be set to the minimum amount payable or the total due amount. The feature can be activated through net banking or by sending a letter to the bank.
• Mobile wallets: Mobile wallets have been offering an option to pay credit card bills on their apps such as Paytm, MobiKwik, PhonePe, and others. You do not have to register on these platforms to make bill payments separately. Just download the app, register with your mobile number and email ID, link your debit card or bank account with the wallet, recharge the wallet, and make credit card bill payment.
• Bank branch: Walk into the nearest bank branch and make a cash deposit against the credit card bill. You need to fill up the deposit slip and produce it at the counter to complete the payment. When you make a payment over-the-counter, you may have to pay an additional fee of around Rs.100 per payment. It will take about one working day to reflect this payment in the card account.
• ATM: A prerequisite to pay credit card bill through ATM is that you must have a debit card from the same bank. In this case, carry your debit card to the nearest ATM and insert the card onto the machine. Choose the option ‘Credit Card Bill Payment’ on the menu and follow the instructions provided by the machine to complete the payment.
  Since the ATM transfers money from your savings account to the credit card account, the payment will reflect instantly.
• Customer care: If you have a savings/current account with the bank that issued the credit card, you can use the customer care feature to make the bill payment. The IVRS will be able to guide you through the bill payment process. Payments made through this method will reflect instantly. However, not all banks provide this service. Therefore, you need to confirm with your bank before using customer care for bill payment.
• Cheque/DD: You can draw a cheque or DD in favour of the credit card account and drop it in the dropbox or a bank branch. Also, write your name and a contact number on the other side of the cheque or DD.
  If you have drawn the cheque/DD from the same bank as the credit card, the payment will take about three business days to reflect. In the case of other banks, it may take up to five business days and outstation cheques may take up to 21 business days to be cleared. You need to consider these timelines to plan your payments.

7. How to calculate interest on credit card bill?

Consider that you have a credit card and you have purchased a dining table for Rs.10,000 on 1 October 2019. For a billing cycle from 15 September 2019 to 15 October 2019, the statement date is 16 October 2019. The bill payment due date is on 4 November 2019.

You will be charged a monthly interest rate of 3.5% on the outstanding balance. Minimum payment, here, means 5% of the bill amount plus any charges applicable.

The general formula to calculate interest is given below,

Interest = [outstanding amount x interest rate per month x 12 months x number of days] / 365

Scenario 1: Full payment made before the due date

Payment made: Rs.10,000
Payment date: 3 November 2019
Payment due date: 4 November 2019
Next statement date: 16 November 2019

Since the payment is made in full before the due date, 4 November 2019, no interest will be charged on the bill. Therefore, you can pay Rs.10,000 to clear the outstanding balance.

Scenario 2: Partial payment made before the due date

Payment made: Rs.5,000
Payment date: 3 November 2019
Payment due date: 4 November 2019
Next statement date: 16 November 2019

Since you choose to make a partial payment within the due date, you must pay a minimum of 5% of the outstanding balance (Rs.10,000). In this case, the minimum payment amount required is Rs.500. However, if you decide to pay Rs.5,000, the interest payable over the period is calculated below.

Interest levied from the date of purchase to the date of payment
= (34 x 10,000 x 3.5% x 12)/365
= 391.2

Interest is calculated based on the number of days between the date of payment and the next payment due date. If the payment is made in two instalments within the payment due date, the last payment date is considered for calculations. In this case, the interest payable is
= (13 x 5,000 x 3.5% x 12)/365
= 74.79

Total interest to be paid = 391.2 + 74.79 = Rs.466