What is Credit Card?

A credit card can be defined as a financial product that's issued by a bank and has a credit limit set in advance and enables you to make smooth cashless transactions.

Your card issuer will calculate your credit limit considering your credit score, credit history, and general income.

After acquiring your credit card statement, you can make repayments without any interest within a certain period. Interest is applied to the balance after the completion of the said grace period.

Learn More About: Top 10 best credit cards in India

What Is A Finance Charge In A Credit Card?

If your question is - what is finance charges in a credit card then here’s your answer. A finance charge or a funding fee is a fee associated with the use of credit.

To elaborate, it is "the total of all fees paid directly or indirectly by any person on the basis of which a loan is granted and approved directly or indirectly by the lender."  

When the 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 (e.g., interest, outbound transaction fees, annual fees, cash advance fees and so on) along with your purchases and other activities.

But before getting into this, it is important to understand how a credit card works when it comes to payments.

How Does a Credit Card Work?

A credit card is an incredibly convenient financial product that can be used to pay for a variety of purchases. Similar to a loan, you can use the amount in your credit card to pay for what you want and then repay the same at a later date.

For example, let us assume that you have purchased an item worth Rs. 20,000. You have the option of repaying this amount in 2 ways -

  1. You can repay the entire amount before your due date and therefore avoid paying an interest amount

  2. 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 which is usually quite hefty and this entire amount will be a part of your finance charge.

How Is A Finance Charge Calculated?

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.

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%.

What Is Unbilled Amount In Credit Card?

In this section, let us understand what is unbilled amount in credit card.

A practical one would be to assume that your credit card statement is generated on the 5th of every month. That way, your credit card statement will include every transaction made between the 6th of the previous month and the 5th of the ongoing month.

During said period, if one makes a transaction of a certain amount from their credit card limit, they would have to pay this amount in their current bill.

But if they made a transaction of any amount on the 6th of the ongoing month, on the day their 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 it is an easy process, 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.

What is outstanding amount on a credit card?

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 :

Credit Card Amount And How It Relates To Credit Score

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.


Hopefully this article answered all your questions regarding a credit card and certain offbeat terms associated with it. 

Sometimes we end up securing a credit card which is not ideal for our lifestyle and incur high monetary losses. This article will prevent such possibilities. 

What is credit card Related Faqs

It is a credit product offered by a banking institution and allows its customers to use amounts up to a pre-approved credit limit. Cardholders can conduct purchase transactions for goods and services in a cashless manner using a physical card.

The four main networks are Visa, Mastercard, American Express and Discover. These are the prime credit card networks, to which a number of credit cards belong.

Yes it is. However, it may be expensive because many credit cards often charge a foreign transaction fee of around 3% every time money is spent. You could also be charged for cash withdrawals and interest from the moment you get your money.

The full form of APR is Annual Percentage Rate and is used to compare credit cards with personal loans. It considers the rate of interest to pay, as well as any additional fee.

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