How Do Credit Cards Work? Important Points to Know

Issuers offer a wide range of credit cards, each catering to different spending habits or lifestyle preferences. So, choosing the right card becomes crucial but can be overwhelming, especially if you are choosing your first card. 

To make things easier, here’s a comprehensive guide on all you need to know about credit cards as a beginner.

How Credit Cards Function

These cards work just like debit cards. A key difference is that with debit cards, you are using money from your account, but with credit cards, you are borrowing from the issuer. One point to note is that you can use this card only up to a certain limit. This limit is assigned at the time of approval. 

Issuers give you a limit based on your profile and the type of card you choose. So, whenever you pay with your credit card, the amount will be deducted from your limit. Upon repaying the utilised amount, your limit will be restored. 

Here’s an overview of how this works:

• You have a card with a set limit; assume ₹1 lac
• You make transactions amounting to ₹25,000
• Your available limit will now be ₹75,000
• You pay your bill in full
• Your limit will be restored to ₹1 lac
• If you pay ₹20,000, your limit will be ₹95,000
• The remaining ₹5,000 will be outstanding 

An important point to note is that, unlike other forms of credit, the amount you use from your credit card limit does not attract interest from the first day. Issuers offer an interest-free period, during which all your transactions are interest-free. This period is until the due date mentioned in your statement.

So, if you roll over any balance, it will attract an interest as per the issuer’s policy. Additionally, there will be no interest-free period until you pay the entire outstanding balance.

Features of Credit Cards

Here are some important characteristics of a credit card:

• You can earn rewards on most payments, which you can redeem as per the issuer’s policy
• You can get complimentary membership and subscription 
• You can use the card to withdraw cash, up to a certain limit, from an ATM
• You can convert your big-ticket purchases or the card bill into EMIs
• You can make contactless payments depending on the card you have
• You can get discounts on payments made at partner stores
• You can boost your creditworthiness with responsible use of the card
• The issuer may levy additional charges, such as late fee or annual fee, as per the terms and conditions

Pros and Cons of Credit Cards

Here is an overview of the advantages and disadvantages of using these cards:

Requirements of Credit Cards

Financial institutions offer credit cards only to select applicants who meet their eligibility criteria and can submit the required documents. The requirements vary depending on the issuer and card you choose. That said, here are some general requirements you need to fulfil when you apply for a credit card:

• Eligibility
  • Should be above 18 years of age
  • Should be an Indian citizen
  • Should be self-employed or salaried
  • Should have the minimum income required
  • Should have a good credit score

• Documents
  • Proof of address (PAN, passport, voter ID, Aadhaar)
  • Proof of identity (PAN, driver’s licence, voter ID, passport)
  • Proof of income (Form 16, salary slips, bank statement, ITR)

Tips to Use Credit Cards Smartly

Here are some pointers to get the most from your card and your finances:

• Pay your bill on time and in full to enjoy the benefits of your card
• Monitor rewards you accumulate to use them before expiry
• Maintain your utilisation under 30% to keep payment manageable
• Review your statement carefully and report errors, if any, immediately
• Avoid withdrawing cash using your card unless necessary
• Set transaction limits wherever required to protect your finances
• Don’t disclose sensitive details like CVV, PIN, and OTP to anyone

Armed with this information, apply for a credit card that suits your requirements. For example, if you make online payments often more, choose a card that offers more rewards on such transactions. This will allow you to maximise your benefits. Remember to also compare your options to choose one that offers the reward points for your preferred spending categories habits. 

One option that you can rely on is the One Credit Card. You can get 5Xaccelerated rewards on your top two spending categories, easy EMI conversion facilities, and other exclusive perks. Its mobile application enables you to control all aspects of your card and easily manage your card and payments without any hassles.

You can use it to set your transaction limits, track and analyse your spending, check offers near you, and much more. This way, you can use your credit card confidently and make the most of every purchase payment. Apply now to get yours with no joining, annual, or redemption fee.