Credit card: What it is, how it works, and what to check before applying

In today’s rapidly changing era, credit cards are a necessity and a cornerstone of financial flexibility. They act as a revolving line of credit and these credit cards permit users to make purchases, pay bills and withdraw cash up to a pre approved limit.

Due to the seamless and smooth nature of credit card usage, their popularity is rising. This is primarily driven by the cashless economy and the need for quick access to funds. The credit card count in the country has more than doubled in five years, while debit card growth remained modest.

Digital payments surged 94-fold since 2013, showcasing the country's rapid fintech transformation and UPI-led expansion. Therefore, as more people embrace digital finance tools for the first time, credit cards are becoming a key part of this shift, especially for those seeking convenience, flexibility, and credit-building opportunities as first time users.

Highlighting this trend, Anup Agarwal, Co-founder at Kiwi, said, “For first-time users, a RuPay credit card on UPI is a great way to start their credit journey. It allows convenient payments at local stores while offering the benefits of credit. Using it for regular expenses and repaying on time can help build a strong credit profile.”

What is a credit card?

A credit card is a plastic or virtual payment tool which is issued by a banking institution or NBFCs. It permits users to borrow money for purchasing goods or services. It includes a preset spending limit, interest terms, and a billing cycle.

How does a credit card work?

A credit card permits users to borrow from a bank for purchases, to be repaid within a set period. Each card has a credit limit. Paying the full bill by the due date can help avoid interest, but carrying a balance attracts charges. Credit cards are widely used for online shopping, travel, and bill payments in the nation.

Basic eligibility and application essentials

As a prudent and well informed aspirational user of a credit card you should check your eligibility before applying. Most credit card issuers require elements such as a minimum age, income level, credit score along with clean repayment history to permit you to use their credit card. Your credit score plays a vital role in approval and credit limit.

A good credit score i.e., a score of over 750+ generally helps applicants get better terms. That is why you should always review your credit report for mistakes and errors before submitting an application for a new credit card.

Common credit card charges at a glance

Understanding credit card fees is key to avoiding unexpected costs. Here's a quick breakdown:

• Joining fee: ₹0– ₹5,000 (some cards are free for life)
• Annual fee: ₹500– ₹5,000 (often waived with usage)
• Late payment fee: ₹100– ₹1,300
• Finance charges: 30%–48% per annum on unpaid balances
• Over-limit fee: 2.5%–3% of exceeded amount (min ₹500)
• Cash withdrawal fee: 2.5%–3% (min ₹300 – ₹500)
• Foreign markup: 2%–3.5% on international spends
• Card replacement: ₹100– ₹250
• EMI conversion fee: 1%–2% or flat ₹150– ₹500

Note: The charges discussed above are illustrative in nature. Fees vary by issuer, card type, and user profile. Always read the terms and conditions carefully. Some charges may be waived based on spending, timely repayments, or promotional offers.

Key factors to keep in mind before you apply

• Understand the fees: Credit cards may include joining fees, annual charges, hidden amounts and penalties. Some issuers waive initial charges, but check the terms carefully. If in doubt, carefully discuss with the customer support team of the credit card issuing authority and resolve your doubts.
• Choose the right card: Pick a credit card that suits your spending pattern, be it cashback, travel, or shopping rewards. Your credit card should go as per your monthly income and should not be a burden for you. It should provide peace of mind to you while you carry it in day to day life.
• Avoid multiple applications: Too many applications can hurt your credit score. Apply only for the most suitable card. Do not rush with more than one application preferably in three to six months. So that you can keep your credit profile blemish free.
• Plan repayments: Always pay your credit card bills, EMIs along with other essential credit payments in full and on time to avoid interest and build a good credit history. Do set auto debit to ensure you never miss any payments.
• Track spending: Use your bank application to monitor spending. Set limits and alerts to avoid overspending. Setting a limit on your credit card will also prevent you from serious financial frauds and keep your monthly expenses in check.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.