What is a credit card? Should you own one?

Picture this scenario: you have your eye on a brand-new iPhone 15, a shiny piece of tech that promises to make your life simpler. But here's the thing: your wallet's feeling a little light. 
This is where credit cards come in clutch, offering you a way to buy that phone now and pay for it later.

In this blog post, we will explore how these little plastic rectangles can provide a world of financial flexibility, making it easier for you to manage your expenses, handle emergencies, and even improve yours. 

So, let's take a step back and start from the beginning - What exactly are credit cards, and why do you need one?

What is a Credit Card?

Credit cards are like IOUs from a bank.

When you use a credit card to make a purchase, you are not actually paying for the item with your own money. Instead, you are borrowing money from the bank and will need to pay it back later, plus interest (if you don't pay on time).

The credit card company will give you a credit limit, which is the maximum amount of money you can borrow. You can spend any amount up to your credit limit, but you must make at least the minimum monthly payment on time to avoid late fees and interest charges.

Let's take the same iPhone example:

When you use your credit card to buy that iPhone, the credit card company is essentially giving you an IOU for the purchase amount. 

How does a credit card work?

Understanding how a credit card works is essential for responsible and effective use. Here's an explanation of how a credit card operates:

➡When you use your credit card to make a purchase, the merchant's bank requests your credit card issuer to either approve or decline the transaction. 

➡If the transaction is approved, the merchant's bank is paid, and your credit limit is reduced by the purchase amount.

➡You will receive a statement from your bank at the end of each month showing all your purchases and payments. 

You have a grace period, aka an interest-free period of up to 50 days from the statement date, to pay without incurring any interest charges. However, if you do not pay off your entire balance during this time, you will be charged interest on the remaining balance.

Types of credit cards

When it comes to credit cards, there are numerous options available to suit your spending habits and lifestyle. From rewards to cashback, low-interest rates to high credit limits, each credit card comes with its own unique set of features and benefits aimed at meeting the specific needs and preferences of the consumers.

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1. Rewards Credit Cards

Rewards credit cards are designed to incentivise spending by offering various rewards programs. These programs typically earn you points or miles, which can be redeemed for travel, merchandise, cash back, or gift cards. Popular rewards credit cards include:

• American Express Membership Rewards Credit Card
  Base reward rate:  1% to 5%
• SBI SimplyCLICK Credit Card
  Base reward rate: 0.25% to 2.5%
• HDFC Infinia Metal Edition Credit Card
  Base reward rate: 3.3%

2. Cashback Credit Cards

Cashback credit cards are a great way to earn back a percentage of the amount you spend on eligible purchases. Whenever you use a cashback credit card, you receive a certain percentage of the purchase amount as a cash reward or rebate, which is credited back to your credit card account.

The cashback percentage may vary based on the card issuer, the type of purchases, or specific categories. Some cards offer higher cashback rates for specific spending categories such as groceries, gas, dining, or travel. Others may have a flat cashback rate for all purchases. There are many popular cashback credit cards available in the market to choose from. Some of them are:

• SBI Cashback Credit Card
  Cashback rate: 1% to 5%
• Axis Bank Ace Credit Card
  Cashback rate: 2% to 5%
• HSBC Cashback Credit Card
  Cashback rate: 1.5% to 10%

3. Travel Credit Cards

Travel credit cards are specifically designed to offer benefits, rewards, and perks that are tailored for people who love to travel. These cards often come with features such as travel rewards, sign-up bonuses, travel insurance, airport lounge access, no or low foreign transaction fees, and hotel and airline-specific perks. Some of the most popular travel credit cards include:

• Club Vistara IDFC FIRST Credit Card
• Axis Bank Atlas Credit Card
• Axis Bank Vistara Signature Credit Card

4. Secured Credit Cards

Secured credit cards require a cash deposit as collateral, which serves as a form of security for the credit card issuer in case you default on your payments. Typically, the credit limit equals the deposit amount or sometimes a percentage higher.

Secured credit cards are often used by people who are new to credit or trying to rebuild their credit history. By using a secured credit card responsibly and making timely payments, you can demonstrate your creditworthiness. Some of the best-secured credit cards available include:

• IDFC FIRST WOW Credit Card
• SBI Advantage Plus Credit Card
• SBI Unnati Credit Card

5. Co-branded Credit Cards

Co-branded credit cards are a type of partnership between a credit card issuer and a company, usually a retailer, airline, hotel chain, or other businesses. These cards display the logos of both the issuer and the partnering company.

They typically provide benefits that are specific to the brand or business. For example, an airline co-branded card may offer frequent flyer miles, priority boarding, or free checked bags. Similarly, a retail co-branded card may offer discounts, rewards, or special financing options at that particular store. Some of the popular co-branded credit cards are:

• Flipkart Axis Bank Credit Card
• Amazon Pay ICICI Credit Card
• Swiggy HDFC Credit Card

Pros and Cons of using credit cards

Should you own a credit card?

Whether or not you should own a credit card depends on your individual circumstances and financial goals. Credit cards can be a valuable tool for building credit, managing your finances, and taking advantage of rewards programs. However, they can also lead to debt and financial problems if not used responsibly.

Here are some of the risks of owning a credit card:

• Debt: If you don't pay off your credit card balance monthly, you will be charged interest. This can quickly lead to debt, which can be difficult to repay.
• High interest rates: Credit cards typically have high interest rates, making it expensive to carry a balance.
• Late fees: If you make a late payment, you will be charged a late fee. This can add up quickly and make it even more difficult to repay your balance.

Here are some tips for using credit cards responsibly:

• Only charge what you can afford to pay off in full each month.
• Make your payments on time to avoid late fees.
• Keep your credit utilisation ratio low. This means that your total outstanding credit card balance should not exceed 30% of your total credit limit.
• Be aware of the fees and terms of your credit card agreement.

Conclusion

Owning a credit card can be beneficial if used responsibly, helping build credit history and providing perks like rewards and cashback. Yet, mismanagement can lead to debt accumulation and financial stress.
If you're considering owning a credit card, it's crucial to understand your spending patterns, your ability to pay off balances on time, and the features that suit your lifestyle.

With Select, you can simplify this process by comparing 50+ credit cards and Genie, which assists in selecting the right card based on preferred networks and income brackets, ensuring a tailored fit for your financial needs.