Credit cards can be perplexing for the first time users as they are a lot more than just a piece of plastic and it is imperative to have a basic understanding of credit cards in order to use them effectively. Credit cards usually differ in terms of rewards, benefits and privileges they offer but the basic features mostly remain the same for all credit cards. However, once the customer understands the basics of credit cards, it becomes easier for him/her to choose the credit card wisely.
Let’s have a look at the basic credit cards terms to build the credit card vocabulary.
Annual Fee
The annual fee on credit card is the most common type of all credit card fees and is automatically charged by the banks annually. However, there are some cards that come with zero annual fees. There are various cards on which the annual fee is charged from the second year onwards.
Credit Limit
A credit limit is referred to as the maximum amount of credit that the bank or the lending institutions extend to the credit cardholder. A credit limit is based on various factors such as if the customer is capable enough to make interest payments, the ability to repay the credit card debt. Moreover, if the customer spends beyond the set credit limit, he/she will have to pay the over-limit charges.
For instance, even if the customer has spent Rs.10 over the limit, he/she will have to pay a minimum amount. For most of the banks, a minimum of Rs.500 is charged but it also depends on the amount by which one has crossed the credit limit.
Furthermore, there are two important terms that come to one’s mind whenever he/she checks his/her credit card balance and the terms are- Total Credit Limit and Available Credit Limit.
Total Credit Limit: It refers to the actual credit limit that one is provided by the bank at the time the card is issued and it remains the same throughout the card is active and is in use.
Available Credit Limit: It refers to the credit limit available that can be used at a particular point of time on one’s credit card. In other words, the available credit limit is the difference between the total credit limit and the outstanding due amount on the card.
For example,
Total Credit Limit – Rs. 1 Lakh
Total Amount Spent – Rs. 10,000
Available Credit Limit – Rs. 90,000
Cash Limit: The other important term relating to a credit card is the cash limit. It refers to the maximum amount of cash that the cardholder can withdraw using his/her card. Banks usually provide 20% to 30% of the total credit limit on a credit card as a cash limit.
Note: The cash limit varies from bank to bank.
Annual Percentage Rate (APR)
Annual Percentage Rate refers to the interest rate which the credit cardholder is required to pay annually instead of paying monthly fee/rate applied on a credit card. The Annual Percentage Rate (APR) charged on one’s credit card also affects his/her bills, especially when he/she carries an overdue amount. This is the reason why holding a credit card can be expensive because the interest rates on credit cards are quite high, but this is only applicable when one does not pay the total outstanding amount. Also, if the customer only pays the minimum amount due, the interest keeps accruing on the balance daily, for as long as it stays in his/her account. Credit Card APR can range anywhere between 30-45% per annum.
Interest-Free / Grace Period
Interest-Free/Grace Period refers to the period between the end of credit cardholder’s billing cycle to the payment due date. If the customer pays his/her due payments on time only then it will be interest-free. The banks usually provide the grace period between 20 to 60 days.
For instance, if the cardholder makes a purchase worth Rs. 50,000 on the first day of his/her billing cycle and pays off her outstanding balance on the due date. In such a case, no interest will be charged in the next month’s purchase. On the other hand, there’s another customer who also makes a purchase worth Rs. 50,000 and forgets to pay the outstanding amount of Rs. 1,500 at the end of the billing cycle, so he/she can pay the amount during the grace period in order to avoid any interest charges.
Note: The grace period varies from bank to bank.
Revolving Credit
Revolving credit refers to a line of credit where the credit cardholder pays a commitment fee to the bank to borrow money and is also allowed to use the funds as and when needed. However, if the cardholder pays an amount less than the total amount due, he/she will have to pay the finance charges on the entire outstanding amount.
Security Code (CVV)
The security code or CVV (Card Verification Value) on one’s credit card is basically a 3 digit number for all the types of credit cards. It is mandatory to provide the CVV number when making a purchase online. Customers, sometimes, get confused between PIN and CVV number and it is advised to never the PIN when asked for CVV.
Primary and Secondary Credit Cardholder
Primary Credit Cardholder:
A primary credit cardholder is the one who’s legally responsible for all the charges relating to his/her credit card. A primary credit cardholder has to ensure that the payments are made on time, has to set the limit of its usage, review the monthly credit card statements and many more.
Secondary Credit Cardholder:
A secondary credit cardholder also called the Add-on Cardholder can avail all the benefits, discounts, offers associated with the credit card, but the secondary cardholder’s credit limit is set by the primary cardholder. Legally, the secondary cardholder is not liable for any charges.
Suggested Read: Pros and Cons of Add-on Credit Cards
Free Credit Period
A free credit period refers usually varies from 20-50 days during which the bank doesn’t charge any interest to the cardholder. However, after this period, one has to make the payment for the purchases against the credit card. If the customer fails to pay the outstanding amount, then he/she might lose the privilege of free credit from that particular date onwards.
Total Amount Due
The ‘Total Amount Due’ refers to the amount due for payment as on the date of statement date. It consists of one’s opening balance, new purchases, fees, and finance charges if any, minus the last payment or any other due credits.
Minimum Amount Due
The ‘Minimum Amount Due’ refers to the minimum amount that one is required to pay, on or before the payment due date, to in order avoid late payment penalties and negative remarks on the credit report. However, by calculating a minimum amount of the credit cardholder, the bank ensures that he/she is able to repay a portion of the principal outstanding every month.
Advice: Customers must always pay the total amount due to avoid the rate of interest which is charged on the remaining amount from the date of purchase and on the current month statement as well.
Finance Charges
Finance charges also called ‘Best Low Interest are payable at the monthly percentage rate on all transactions from the date of the transaction in case the cardholders choose not to pay his balance in full till it is paid back. Finance charges, if payable, are debited from the account till the outstanding on the card is paid in full.
Also Read: Best Low-Interest Credit Cards in India
Credit Card Insurance Cover
Customers need to have credit card insurance as it offers security in case of unemployment, disability, injury, or even death. Customers can avail the facility of credit card insurance by paying a monthly fee that varies from one bank to another. Credit Card insurance is classified into the following types:
- Air Accident Insurance
- Fire and Burglary Protection
- Travel Insurance
- Emergency Overseas Hospitalization
- Emergency Assistance
- Rental Insurance
- Lost Liability Cover
- Purchase Protection
Suggested Read: Credit Card Insurance Benefits
Late Payment Charges
Late Payment Charges are applicable if the customer fails to pay the minimum amount due on the due payment date or after the grace period is also over. If the customer’s payment is due at a minimum of 21 days after the end of his/her billing cycle and he/she makes a payment after his/her due date or make less than the minimum payment, he/she will be required to pay late fee charges.
Credit Utilization Ratio
The credit utilization ratio refers to the percentage of a credit holder’s total available credit that is currently being utilized. The purpose of credit utilization ratio is to calculate the credit score. However, lower the credit utilization ratio better the credit score.
Payment Network
A credit card may belong to any of the four major networks- MasterCard, Visa, Discover or American Express. It is the card network that sends payment authorization request to the issuing bank from the acquiring (merchant) bank.
