What is a credit card?
A credit card is essentially a revolving line of credit. Unlike a debit card, which pulls money directly from your bank account, a credit card allows you to borrow money from a bank (the issuer) to make purchases, up to a certain limit.
Here is a breakdown of how the cycle works, how to avoid interest, and how the companies make money.
How do credit cards work?
- Spending: You use the card to buy things. The bank pays the merchant on your behalf immediately.
- Statement Date: At the end of the 30-day cycle, the bank closes the books and sends you a statement. This lists every purchase you made and your Statement Balance.
- Grace Period: You typically have 21–25 days from the statement date to pay the bill. This is called the grace period.
- Due Date: This is the deadline. If you pay the entire statement balance by this date, you are not charged interest.
Costs associated with a credit card
There are certain fees associated with a credit card. Always read the terms and conditions document associated with your credit card. Some of the common fees that banks charge are mentioned below, and this is not a comprehensive list:
- Annual Fee: A yearly membership charge. This is ₹0 for LifeTime Free (LTF) Cards.
- Late Payment Fee: A penalty for missing your due date.
- Interest: The cost of not paying your bill in full and carrying a balance.
- Cash Advance Fee: A charge for withdrawing cash at an ATM using your credit card.
- Foreign Transaction Fee: A 0-3.5% surcharge on purchases made outside your country.