Know what is a credit card and the benefits of having a credit card. It also important to know how to use credit card wisely to avoid credit card debt which you will learn here.


Credit cards give you the luxury of having cash available to you anytime. You can use them for shopping, booking online movie tickets, air tickets or train tickets, online fee payments, insurance premium payments or fuel refills at fuel stations. Spending on credit cards also offers rewards, discounts and cashbacks as per the offers. For all this spending, it is not necessary if you have cash in your bank account or not.

Credit cards are different from the debit cards. You can use a debit card for spending only if you have cash in your savings bank account. In case of credit cards, you do not need to have money in your bank account to make spending. It is a credit or borrowed money, given by the credit card issuing institution. Visa, mastercard and american express are the major credit card payment networks.

However, this luxury of always available cash can ruin your finances if you don’t use your credit card fairly. You have to pay the credit card bills regularly and timely to make the best use of a credit card. Otherwise, you can easily get trapped in credit card debt very badly even before you realize it.

We will discuss here how to use a credit card responsibly. This helps us in avoiding credit card debt and building a good credit score.

What Is A Credit Card?

A credit card is a plastic card issued by a credit card company used to make payments at the merchant stores or online websites. The money used for payments is a borrowed money or credit money. The credit offered here is totally free of any interest rate or other charges.

Important thing to remember is that this credit is free only in two conditions :-

  • If the card is used only for shopping and at merchant sites. This does not include cash withdrawals.
  • If you payback the entire amount spent to the lender by the payment due date.
What is a credit card

If you don’t pay the due amount by due date, then you have to face the penalty and interest charges.

If you use your card to withdraw cash from the ATM machine, then this credit amount is not free.There is a one time fee for the withdrawal transaction and much higher interest charges on the amount withdrawn.

How Does A Credit Card Work?

After you are issued a credit card, a billing cycle is assigned to your credit card account. This is like a revolving account. A credit amount limit is fixed up to which you can use your credit card for spending. This is called the credit limit of your credit card.

Now, let us understand how a credit card works !

The specific credit card information you must know :

  • 16 digit unique credit card number – printed on the front of the card
  • Credit card expiry date – printed below the credit card number
  • Card Holder Name – printed on the front of the card
  • 3 digit secret CVV number – printed behind the card
  • 4 digit PIN number – it is confidential and not printed but provided to the holder

You can use credit card for offline shopping or online shopping.

Offline – To use a credit card offline, at any outlet or store, you produce your card to the merchant. The merchant swipe the card on a card swiping machine. The bill amount is entered on the machine and you are asked to enter your 4 digit PIN to complete the transaction. After successful transaction, the bill amount is deducted from your credit limit.

Online – For online transactions on online websites, you would need to enter all the above credit card specifics mentioned above when checking out and making payment. To ensure this transaction secure and authentic, one time password (OTP) is sent to your mobile number registered with the card issuing institution. After you enter the correct OTP, the transaction is executed successfully and the billed amount deducted from your credit card limit.

A particular date is assigned to your credit card account, on which all the spending we made on a credit card are added up. A bill for credit card is generated on this date which is called as credit card statement. Amount billed in the credit card statement is called as the total amount due.

After statement generation, around 15 day period is given to pay the bill amount to the lender or the Credit Card issuer bank. The date by which you have to pay the bill amount is called as the payment due date.

Not making payment before the due date attracts penalty as well as interest charges.

You have two options to make payment. Either you can pay the entire due amount by the payment due date. If you pay entire amount, then there are no interest levied to you.

Alternatively, the card issuing bank gives you the liberty of paying 5% amount of the total amount due. This amount is called as minimum amount due. This is the amount you must pay by due date.

Paying minimum amount due on or before the Due date does not attract any penalty. You need to pay interest charges only. Interest rate charges are levied on the outstanding amount only, the amount left after paying the minimum amount due.

Interest rate charges levied by the credit card companies are very high as compared to the routine interest charges you need to pay for a personal loan.

Credit Card Interest Rates

The credit or borrowed money used for spending on a credit card is totally interest free till the payment due date. This is interest free period which is normally between minimum of 20 to maximum of 52 days. No interest is levied to you in this time period.

However, if you do not pay the total amount due on or before the payment due date,then you will be liable for interest charges. If you do not pay even the minimum amount due before the due date, then you become liable for penalty also which is in addition to the interest charges.

Credit card interest rates of nearly 1.5% per month are imposed by the credit card companies on the outstanding or balance amount. It comes out be around 36% per year as compared to a personal loan which you may get for around 9% per year.

Let us understand the credit card functioning with an example. I hold an ICICI Bank credit card.

The credit limit for it is fixed at ₹ 1,70,000. This means I can make maximum spending of that much amount on my card. credit card statement is generated on date of 28th of every month. Payment due date is fixed at a date of 15th or 16th of next month depending upon if the month gone by was of 31 or 30 days respectively.

Now to avoid any kind of charges, I need to pay the total amount due on or before payment due date. Then the credit amount I used for my expenses will be totally free.

So, I get interest free credit for maximum of 45 days if I had made spending on date 29th. It is 30 days of monthly cycle and 15 days I get to make payment by payment due date. If I make spending on 27th of a month, then I get 18 days of interest free credit because bill or statement will be generated the very next day I.e. on 28th.

Now coming back to the payment to be made, I can also opt for paying a part of the total amount due which is the minimum amount due. This is the 5% of total amount due.

Paying minimum amount due ensures that you didn’t get penalize but only need to pay the interest charges on the outstanding bill amount.

The outstanding amount is subtracted from the credit limit. So your credit limit is reduced till you clear all the dues.

Credit Card Benefits?

There are several benefits of having a credit card. It is an asset for you when you have a credit card in your wallet.

1. Having a credit card ensures you have always money at your fingertips. You can avail the benefits of time to time discount offers on shopping even when you are short of cash in your savings bank account.

2. Using a credit card for transactions results in reward points credited to your account. These are free incentives offered by the card issuing companies. You can use the credit card reward programs to redeem these points for free gifts or to make payment to your credit card bills.

3. Making payments on fuel stations with credit cards offers cash discounts by most of the credit card issuing companies. Discounts may not be much but whatever you get is good. At least you can use these discounts to pay toll charges on highways.

4. If you are having a good paying history towards credit card bill payments, you are offered personal loans with time to time offers. These are the easiest kind of loans available as they require nil or little paper work.

5. Having a credit card with good payment history helps you build good credit score. Good credit score help you get loans easily sanctioned at the time of need.

6. If you have more than one credit card, you can use the facility of balance transfer to get interest free credit for some more time. If this facility is available on your card, you can transfer the due credit card balance amount from one credit card to the other card. Sometimes, credit card issuers also offer lower interest rates when balance transfer is availed.

7. There are still more credit card services you get like converting big card payments to easy monthly installments or EMIs, credit card bill payments by reward points, SMS alerts, online credit card payment and card protection plans against frauds.

How To Get A Credit Card

To get a regular credit card is a tough task as compared to the student credit cards. This is because of the required documentation and a lengthy verification process. As credit cards are unsecured loans, the credit card issuing companies take lot of care before a card is issued to you.

The credit card issuers have to ensure that you will be able to make timely and asked payments to the companies on due dates. People with regular employment and a handsome salary are relatively better placed to get a credit card issued.

List of documents required to apply for a credit card :-

  • Identity proof document
  • Residence proof document
  • Proof of your current employment
  • Income or salary proof certificate
  • Last six months bank statement
  • Passport size photographs

After you provide all these documents and the credit card issuing company is satisfied with the verification process, you may get your credit card in one to two weeks of time. It is delivered at your residential address in a registred post.

However, if you are unable to get a credit card through this process, you can get it as a secured loan. You can get a credit card issued to you against your fixed deposits or balance maintained in your savings bank account. However, the credit limit of such credit cards is only equal to the fixed deposit or balance maintained. If you fail to make bill payments, the card company can get the money back from your deposits.

Different companies offer different types of credit cards ; like american express, platinum cards, forex cards to name a few. A forex card is an international credit card which is more useful to frequent travellers. The companies may charge credit card fees at the time of joining and on annual basis while some are life time free with no annual charges, depending upon which credit card we opt for.

How Long Does It Take To Get A Credit Card?

How long does it take to get a credit card depends upon your personal profile. Credit card issuer will issue you a credit card only if they believe that you can make payments back to them. Usually you may get a credit card from 2 weeks to a month time.

If you are an employed person with a good carry home salary, you can get a credit card easily.Just submit your salary statement with the application form.

You can get instant credit card against a fixed deposit (FD) with the credit card issuing authority. The credit limit sanctioned to you is equal to the fixed deposit amount.

How To Use Credit Card Responsibly?

Having a credit card gives you so much cash freedom or leverage. It is very useful in emergencies when you are short of cash. You do not have to wait to buy something till you have required money if you hold a credit card.

But it is very important to use credit card responsibly. Otherwise, it can make your life miserable if you get stuck in credit card debt. Credit card rates are very high and you can easily get trapped in a credit card debt.

Another very important thing to remember is that you should never share your credit card details with anyone. The card issuers always keep warning their customers against it. It is a step to prevent the online frauds on cards.

Always Pay Total Amount Due

First and foremost important thing is that you pay the total amount due by the due date. Don’t get carried away by the luxury of paying minimum amount due. Why to pay unnecessary interest charges if you can make full credit card payment?

You should be aware that paying total amount due by the payment due date keeps all your spending transactions interest free. If you opt for minimum amount due, the outstanding amount, of course, is charged but even the future spending transaction you make also start attracting interest charges from that very day you made it. Now they are no longer interest free.

So, the outstanding amount starts piling up on due to high rates of interest. Over the time it becomes very difficult to clear those balance amounts.

Invest Your Liquid Cash To Make It Grow

You can keep using your credit card for your daily routine expenses. Leave the liquid cash you have in your savings bank account to grow.

The banks give interest rates of about 3% on the idle cash you hold in your savings account. Alternatively you can opt for short-term fixed deposits or liquid mutual funds to get higher returns.

When the payment due date nears, dissolve the fixed deposits or the liquid funds and make full payment for credit card bill.

Be Vigilant To Your Expenses

Always keep an eye on your spending through credit card. By making payments through a card, you don’t feel the pain of money slipping out of your hands which we normally do while making cash payments. This may lead to overspending and big credit card bills.

Never Use Credit Card For Cash Withdrawal

Never use your credit card to withdraw cash at the ATM machines except in dire emergency. If you have to, pay back as soon as possible.

Split Big Transactions Into Smaller

If you have made a big amount transaction on your credit card and it is not possible to payback full amount, get it converted to equated monthly instalments (EMIs). Doing so attracts lower interest rates of around 12% as compared to normal rates of around 36% per year.

Hence,there are several ways to use your credit card wisely. Taking care of them, credit cards can be very advantageous to you finance.

So, if you use credit card wisely, it can be very useful for your savings account. Just use credit card issuer’s money to meet your expenses and make your money to grow every month.

Another big advantage you get is a good credit score. However,following the above rules for wise use of all credit cards for excellent credit score is must.

Having a good credit score makes you eligible to get loans from the financial institutions. Lending companies always look at your credit score before issuing loans.

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