Common FAQs on How Credit Cards Work

Posted by arwindsharma on April 28th, 2019

An increasing number of the population is looking to avail a credit card to enjoy financial freedom, convenience, and the additional benefits on offer. However, before someone opts for this financial tool, they should ensure that they understand what a credit card is and how it works.

Let’s take a look at some common FAQs to understand this financial product.

  • What are credit cards?

A credit card is a financial tool issued by different financial institutions (including NBFCs) to an eligible applicant. A cardholder can purchase products, pay for services or make other financial transactions using this card. The money is borrowed from a line of credit issued to that individual. The cardholder will have to repay the debt within due date, along with leviable interest if required.

There are various advantages of using a credit card. It provides the borrower with a longer timeframe to repay the debt. Also, financial institutions run several loyalty programs that offer benefits to their customers against the money they spend.

  • What is a credit account?

A card is generally paired with a credit account issued by the financial institution. This account carries the credit limit. Any credit utilised or repaid will reflect under this credit account.

  • What is a credit limit?

A credit limit is the maximum range issued by a credit card lender. It is generally determined when a card is issued; however, a borrower can request an upper limit increase at a later point of time.

Various factors play a crucial role in determining one’s credit limit. Lenders look at credit score, financial history, current liabilities, FOIR, repayment capability, and various other factors before allocating one’s credit limit.

  • What is a card’s unpaid balance?

It is the aggregated amount of money the borrower has availed using that card but hasn’t repaid yet. This value will increase with every transaction made using that particular card. It also reflects as the due amount in the card statement.

  • What is available credit?

Available credit is the amount of money the borrower can spend before reaching their credit limit. It changes with the amount of unpaid balance on that individual’s account. For example, if a person’s credit card limit is Rs. 30,000, and unpaid balance is Rs. 20,000, he or she will be able to spend Rs. 10,000 more using the credit card. The available credit gets reset when the total due is paid with each billing cycle.

  • What is a billing cycle?

A billing cycle is a set period from the end of one statement date to another. A cardholder makes transactions during the billing cycle which reflects in the next card statement. The borrower has to pay the minimum or entire due amount after the billing cycle and within the due date.

  • What is the minimum due amount?

The minimum amount due is a fraction of the total unpaid balance. A borrower can repay the minimum due amount instead of the total due every month to avoid paying any late fees. However, the remaining balance will be carried to the next month along with its interest until repayment.

  • What is credit card interest?

Card providers charge a certain rate of interest on the total outstanding amount on a credit card’s account. This interest rate may vary between different financial institutions. Also, a borrower is liable to pay interest if they avail facilities like cash withdrawal offered by cards like Bajaj Finserv RBL Bank SuperCard.

However, SuperCard offers a 50 days interest-free period during which the borrower can repay the money without paying any interest.

Bajaj Finserv also provides various other features and benefits like pre-approved offers on credit cards, personal loans, home loans, business loans, and a number of other financial products. Such offers simplify the process of availing finance and help you save time. You only have to share some essential details online to check your pre-approved offer.

  • What is an interest-free period/grace period?

A grace period is a timeframe when the borrower can repay the due amount without paying any interest. It is generally calculated from the end of a billing cycle to the next payment due date.

  • What are credit card fees?

Financial institutions levy various fees on credit cards. These include –

  • Balance transfer fees.
  • Late payment fees.
  • Cash advance fees.

These above mentioned details are some of the essential information a borrower needs to understand how do credit cards work. It will also aid them to utilise the financial tool properly and avoid any unwanted mistakes.

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