A credit card is a payment card, typically issued by a bank, that allows users to pay for goods and services on credit. Credit cards come with a pre-approved credit limit based on the cardholder's financial credibility.
Credit cards can be used to make instant digital payments at businesses that accept them. They can even be used online by entering the credit card details to make purchases on credit.
Like any other line of credit, the debt accrued through using a credit card has to be paid off with interest. However, if used properly, credit cards can be used without having to ever pay interest.
This article will discuss what credit cards are and how they work.
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Credit cards are incredibly convenient financial products that can be used to purchase various goods and services. Similar to a loan, you can use the amount from your credit card limit to pay for what you want and then repay the same at a later date to your credit card issuer/bank.
For example, let’s say you have purchased an item worth ₹20,000. You have the option of repaying this amount in 2 ways -
You can repay the entire amount before your due date and therefore avoid paying interest
You can pay just the minimum amount due before the due date and pay the rest through installments. In this case, you will be charged an interest rate that is usually quite hefty, and this entire amount will be a part of your finance charge.
A finance charge or a funding fee is a fee associated with the use of credit. These charges usually include interest, but can include other fees, charges, and penalties associated with using the card.
When a legitimate card issuer sends you your monthly statement, it lists all your loan amounts, purchases, and payments. The way the loan fee appears on your statement is dependent on your card issuer.
For example, it may be listed in a separate loan fee category. Or it may include all the elements that make up the loan fee, in the list, along with your purchases and other activities.
Some common types of finance charges are:
Late payment fees
Annual fees
There are several ways a credit card issuer can derive loan fees, but most seem to use the "average daily balance" method and calculate the amount daily.
Step 1 : Divide the APR by 365 (or 360) to get the daily rate. To elaborate, a credit card with an APR of 12.78% would have a daily interest rate of 0.035%.
Step 2 : The daily interest rate is, then, multiplied by the total number of days in the period of accounting of the statement to calculate the interest rate for each individual loan fee.
Just like in the previous example, if the accounting period is 28 days, and the APR is 12.78%, the accounting interest rate would be 0.98%.
Step 3 : Multiply this interest rate by the amount of debt the APR covers. In this example, if you owe ₹4,000, you will be charged a loan fee of ₹12.52 on your statement.
In this section, let us understand what the unbilled amount in credit card.
Let’s assume that your credit card statement is generated on the 5th of every month. Your credit card statement will include every transaction made between the 6th of the previous month and the 5th of the current month.
During said period, if you make a transaction of a certain amount from your credit card limit, you would have to pay this amount in your current bill.
But if you make a transaction of any amount on the 6th of the current month, on the day your credit card statement arrives, it would be called an unbilled amount because the amount is spent after the credit card statement has been generated.
If you wish to repay the unbilled amount in the following month, you can easily do so if the amount is small. However, if the outstanding bill exceeds your ability to pay off, you would have approximately 20 days to convert said amount into an equated monthly installment.
An outstanding amount on a credit card is the amount one owes to the lender or in this case, the credit card provider.
An outstanding amount on credit card may include these following charges :
Purchases that were made
Cash Advances
Balance Transfers (if any)
Interest Charges
Fees
A lump sum outstanding balance can lower one's credit score significantly, regardless of whether they pay their credit card bills timely each month. This is a result of credit utilization ratio.
The utilization rate is the ratio of credit used with respect to the limit available. If your credit card limit is ₹8,500 and you spend ₹7,000 out of it, it shall affect your score. This corresponds to a credit utilization of approximately 80%. Ideally, your credit utilization ratio should be between 30% to 50%.
A high loan utilization discourages lenders from lending any money, and your credit rating will suffer alongside.
The way to save more and improve your credit score is to pay off your outstanding balance each month on time.
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If you had questions regarding a credit card or certain offbeat terms associated with it, hopefully, they have been answered. Having a good understanding of credit can prevent you from falling into debt traps and help you manage your finances better.
Sometimes we end up securing a credit card that is not ideal for our lifestyle and leads to monetary losses. This is why it is important to research and find which card suits you best.
Fortunately, finding the best credit card for you is now easier than ever. Go to the Moneyview website or install the app to find the credit card for you.
Disclaimer
The starting interest rate depends on factors such as credit history, financial obligations, specific lender's criteria and Terms and conditions. Moneyview is a digital lending platform; all loans are evaluated and disbursed by our lending partners, who are registered as Non-Banking Financial Companies or Banks with the Reserve Bank of India.
This article is for informational purposes only and does not constitute financial or legal advice. Always consult with your financial advisor for specific guidance.
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