What is a Credit Card? - Meaning, Benefits, Uses & Details

What is a Credit Card?

A credit card is a financial tool that helps the cardholder buy goods and services without any cash payment, a card is all you need to transact. This is issued by financial institutions, such as banks or credit unions and comes with a certain credit limit depending on your CIBIL Score, your salary and spending capacity.

At the end of the month or bill cycle, a statement is generated giving out all the details of your expenditure done during that time frame. This amount must be repaid on a monthly basis (or the deadline decided while taking the credit card) with or without interest depending on the T&C of the card.

There are different types of credit cards and one can choose basis their preferences, lifestyle and spending.

How Does a Credit Card Work?

When you have a credit card, the bank/financial institution pays the bill for you, which is then added to your credit card balance. You have to pay off this balance at the end of your billing cycle before the deadline. Failure to do so, an interest is levied on the balance.

Most credit cards also offer a grace period (this may vary for different providers), during which no interest is charged on any new purchases, provided the pending balance is paid in full.

5 Benefits of Using a Credit Card

• Financial Flexibility: Whether shopping online or in-store, booking travel, or paying bills, credit cards allow you to make transactions quickly, securely and whenever you want it. They also eliminate the need to carry large amounts of cash.
• Building Credit Score: Credit card is a great source to build a positive credit history, which is crucial for securing loans, and mortgages, with banks or other financial institutions and even getting better interest rates on various financial products.
• Rewards & Cashback: Many credit cards offer rewards programs, including cashback, points, or miles, which can be redeemed for a variety of perks, such as travel, merchandise, or statement credits.
• Interest-Free Purchases: If you pay off your balance in full each month, you can benefit from interest-free purchases during the grace period, making credit cards a cost-effective way to manage expenses.
• Emergency Fund: In case of emergencies, a credit card can serve as a temporary financial aid, providing access to funds when you need them most.

Top 5 Types of Credit Cards

There are different types of credit cards designed to suit various financial goals and preferences. Some popular cards are,

• Standard Credit Cards: These are basic credit cards with no frills or rewards. They are ideal for those who wish to make their everyday expenses hassle-free and have a good credit score in the long term.
• Rewards Credit Cards: These cards are packed with a variety of benefits such as reward points, cashback, or miles on every purchase. Perfect for individuals who use their credit cards frequently.
• Premium Credit Cards: Balance transfer cards allow you to transfer the balance from one or more credit cards to a new card with a lower interest rate. This can help you save on interest and pay off debt faster.
• Travel Credit Cards: As the name suggests, Travel Credit Cards have travel-specific benefits that make your experience seamless. Lounge upgrades, free parking, flight and hotel vouchers are some of the features these cards offer. Adani One ICICI Bank Credit Card is one such premium travel card that makes travelling a memorable time for you, where every convenience is taken care of from the moment you decide to travel. To explore more, visit www.adanione.com.
• Student Credit Cards: This is ideal for students who wish to plan finances responsibly without being too stressed out about expenses. They typically offer lower credit limits and fewer rewards and help students build credit history for the long term.

5 Factors to Consider While Choosing the Right Credit Card?

Choosing the right credit card depends on your financial goals, spending habits, credit profile, salary and expectations. Here are some factors to consider:

• interest rates: a card with a low annual percentage rate (apr) is ideal if you plan to carry a balance. also, keep your balance to a minimum for lesser interest on it.
• fees: fees like annual fees, foreign transaction fees, and late payment fees associated with the card make it difficult to maintain a card. some cards offer fee waivers for the first year or for meeting certain spending criteria. adani one icici bank credit card offers an annual fee waiver on certain spending making it a win-win deal for you.
• rewards program: choose a card that suits your lifestyle and offers a fulfilling rewards program that aligns with your spending habits. for example, if you travel frequently, a card that offers travel rewards or miles may be more beneficial, if you like shopping then a retail-specific card is meant for you. do your research, truly understand what you want and then choose smartly.
• credit limit: a higher credit limit means higher purchasing power, also means higher risk of going overboard with your expenses till it becomes difficult to sustain. ensure the credit limit matches your ability to repay. being cautious is the way to go.
• perks and benefits: some cards offer additional perks, such as travel insurance, airport lounge access, reward points or shopping cashback. evaluate these benefits based on your lifestyle and needs. adani one icici bank credit card is packed with all these benefits and more making it one of the ideal options to consider.

How to Use a Credit Card Responsibly?

While credit cards are a great financial accessory there are significant downsides to them as well if not used cautiously.

Here are some tips to help you manage your credit card wisely to ensure a healthy and responsible financial life:

• Pay Your Bills on Time, Always: To avoid late fees and negative impacts on your credit score, pay your bills on time.
• Keep Your Utilisation Low as Possible: High credit utilisation can hurt your credit score and lead to financial strain. Use smartly, use only when needed.
• Avoid Impulse Purchases: Use your credit card for planned expenses and emergencies, as impulsive or mindless purchases are what could lead to misuse and financial strain.
• Monitor Your Statements Often: Regularly review your credit card statements to spot any unauthorised transactions, errors or additional charges. Report any discrepancies to your card issuer immediately.
• Try and Pay More Than the Minimum: If possible, pay more than the minimum payment each month to reduce your balance faster and save on interest charges. This will also reduce the accumulation of balance saving you from any strain in future.

Common Myths About Credit Cards

Credit cards are unfortunately surrounded by myths and misconceptions. While everything boils down to a healthy credit score, understanding the truth behind these myths is what will ensure you use it wisely and maximise its benefits completely.

• Carrying a Balance Improves Credit Score: It's a common misconception but in reality, paying off your balance in full each month well before the deadline is the best way to maintain a good credit score. It shows that you are financially responsible and cautious with your expenses.
• Closing a Credit Card Improves Your Credit: Closing a credit card can actually hurt your credit score, especially if it's an older account. It reduces your available credit and can increase your credit utilisation ratio.
• You Need to Use Your Credit Card Frequently: Use your credit card occasionally to keep it active, if not frequently to maintain a healthy credit score. What matters most is how you manage your payments and balance.
• Applying for Multiple Cards at Once is a Good Strategy: Applying for multiple credit cards in a short period can negatively impact your credit score. So, apply strategically, based on your needs and financial situation.

By understanding how credit cards work, choosing the right one, and using it wisely, you can reap the many benefits they offer while avoiding common pitfalls. Whether you're a first-time cardholder or a seasoned user, keeping these tips in mind will help you make the most of your credit card experience.