Credit Card – What It Is, How It Works, and How to Get One

A credit card is a financial tool that a bank or other financial institution provides that enables you to borrow money. The bank sets a pre-approved credit limit within which you are able to buy any good or service from both online and offline retailers. Let’s learn more about how credit cards work now that you are familiar with what they are.

A credit card’s Definition

A credit card is a small, rectangular piece of plastic or metal that is issued by a bank or other financial institution and enables its holder to borrow money to pay for goods and services at businesses that accept credit cards. They impose a requirement that the cardholder repay the borrowed amount in full by the billing date or over time, as appropriate, along with any applicable interest and any additional agreed-upon charges.

  • The credit card issuer may also provide cardholders with a separate cash line of credit (LOC) in addition to the standard credit line, allowing them to borrow money in the form of cash advances that can be accessed through bank teller machines, ATMs, or credit card convenience checks.

  • Compared to transactions that access the main credit line, such cash advances typically have different terms, such as no grace period and higher interest rates

  • Borrowing caps are typically set by issuers based on a person’s credit score. Credit cards continue to be one of the most widely used payment methods for purchasing consumer goods and services today, and the vast majority of businesses allow customers to use them to make purchases.


  • Plastic or metal cards called credit cards are used to pay with credit for goods and services.

  • Interest is assessed on purchases made with credit cards.

  • Stores, banks, and other financial institutions may issue credit cards, which frequently come with benefits like cash back, discounts, and reward miles.

  • Debit cards and secured credit cards are options for people with poor or no credit.

Understanding of Credit Cards

Credit cards typically have higher annual percentage rates (APR) than other consumer loans. Unless there is a 0% APR introductory offer in place for a specific period of time after account opening, interest charges on any unpaid balances charged to the card are typically assessed approximately one month after a purchase is made. If prior unpaid balances had been carried forward from a previous month, however, there is no grace period given for new charges.

  • Credit card companies are required by law to provide a grace period of at least 21 days prior to the start of interest on purchases.

  • This is why, whenever possible, paying off balances prior to the end of the grace period is a good practice. Knowing whether your issuer accrues interest daily or monthly is also crucial because the former results in higher interest fees for as long as the balance is unpaid.

  • If you want to transfer your credit card balance to a card with a lower interest rate, it’s especially critical that you understand this. The savings from a lower rate could be offset by accidentally switching from a monthly accrual card to a daily one.
  • People with bad credit histories frequently look for secured credit cards, which demand cash deposits and give them access to comparable lines of credit.

Various Credit Card Types

  1. Banks, credit unions, or other financial institutions typically issue the majority of popular credit cards, including Visa, Mastercard, Discover, and American Express. Many credit cards entice users with rewards like airline miles, hotel stays, gift cards to popular stores, and cash back on purchases. Credit cards of this kind are typically referred to as rewards cards.

  2. Many large national retailers issue customized credit cards bearing the name of the business on the front to foster customer loyalty. Store cards can only be used to make purchases from the issuing merchants, who may provide cardholders with benefits like exclusive discounts, promotional notices, or exclusive sales. Store credit cards are typically easier for consumers to qualify for than major credit cards.

  3. Credit cards that require a security deposit from the cardholder are known as secured cards. These cards provide constrained credit lines with limits equal to the security deposits, which are frequently refunded when cardholders use their cards responsibly and repeatedly over time.

  4. Prepaid debit cards fall under the category of secured payment cards, like secured credit cards, where the available funds are identical to the sums that are currently held in the linked bank account. Unsecured credit cards, in contrast, do not call for collateral or security deposits.

Benefits of Credit Card Use

Here are some of the top advantages of credit cards:

  • Get It Now and Pay Later 

A preferred method of payment is a credit card, which enables you to purchase what you need right away and pay for it later. Every credit card has a predetermined credit limit that applies to these kinds of purchases. You won’t have to pay any extra money for the purchase if payments are made during the interest-free grace period.  

  • Simple EMI payments

 Using a credit card, you can divide the cost of your purchase into affordable monthly installments. You can better manage your immediate financial expenses by doing this. Therefore, you have the option to spread out the cost of a new TV or phone over a flexible repayment period rather than paying it in full up front.  

  • Redeemable Benefits

 Your credit card rewards points are accrued for each purchase you make. These reward points can be used to pay for travel, lifestyle purchases, or fuel costs.

  • Initial Bonuses

 You receive specific introductory bonuses when you apply for a new credit card. Such welcome bonuses may include additional reward points or unique gift vouchers that can be redeemed at partner stores, depending on the lender you choose.

  • Benefits from discounts and cashback – 

When you spend money on dining, lifestyle, travel, and entertainment, you may also be eligible for discounts and cashback offers at a few of our partner stores. Both online and offline purchases are eligible for these cashback offers.

  • Access to the lounge and frequent flyer miles – 

You can take advantage of a number of travel benefits with credit cards. Some provide priority check-in, additional luggage allowance, hotel discounts, and other perks in addition to flyer miles and free access to airport lounges.

  • Cash Withdrawals Without Interest – 

In India, a lot of credit cards permit emergency cash withdrawals without incurring interest charges.

  • Absence of Fuel Surcharges 

You might be qualified for a fuel surcharge waiver for credit card fuel purchases. In accordance with the lender’s policies, the transaction fee for fuel expenses is therefore waived.

  • Coverage by Insurance 

Some upscale credit cards additionally provide thorough insurance protections like air accident, personal accident, and accidental death coverage.

  • Universal Recognition – 

You can travel without having to worry about carrying a sizable amount of cash because the majority of Indian credit cards are usable abroad.  

  • Simple Auto-payments 

It is a hassle to keep track of approaching bill payment dates. However, you can schedule your recurring payments and never miss a deadline with the help of a credit card’s auto-payment feature. To take advantage of scan and pay features, you can also connect your credit card to your mobile wallet and online payment systems.

  • Improved Credit Score –

Credit rating organizations like CIBIL determine your credit score based on your debt repayment history. As a result, timely payment of your monthly credit card bills raises your credit score and establishes you as a trustworthy borrower. You can obtain loans in the future at a lower interest rate if you do this, which helps you establish a solid credit history.

How Do Credit Cards and Debit Cards Differ?

A debit card and a credit card are distinct from one another in a number of ways. The following is a list of some key distinctions between debit and credit cards:

Source of Funds

Using a credit card is similar to borrowing money. Your payment is made by the credit card company, and you must repay the balance at a later, prearranged date. But when you use a debit card, you use money that is already in your bank account.

Maximum Limit

Your usage is limited to the credit limit on your card because credit cards have them. Debit cards, on the other hand, do not have these restrictions, and your usage is only constrained by the amount you have in your bank account.


When using a credit card, you must pay back the borrowed money on time or before the due date. Debit cards don’t require repayment because they use your existing funds, so this is an advantage.

Interest and Penalties

You will be responsible for paying a fine and interest on the unpaid amount if you don’t pay your credit card bills by the deadline. There are no such requirements with debit cards.


When you use credit cards to pay for purchases, you can receive exciting rewards, deals, and discounts. Although rewards are also offered by debit cards, the number is noticeably lower.

Impacting Credit score

No effect is made by debit cards on your credit score. On the other hand, the way you use credit cards can have a positive or negative effect on your credit score.

Credit Card Components

Knowing what a credit card is and what it means are important, but so is being aware of the parts of a credit card. Here’s a quick look at these aspects.

Logo of the credit card issuer

The bank or financial institution that issued the credit card has its logo and information about its payment network printed on the card.

Name and Credit Card number of the Cardholder

The credit card has your 16-digit card number and legal name as it is listed with the bank printed on it. Having said that, AmEx (American Express) only issues credit cards with 15 digits.\

The Magnetic Strip

Credit card information is stored on a credit card’s magnetic strip. When you swipe your card to pay for a purchase or make another payment, point-of-sale (PoS) devices read it.

Visa, Mastercard, and Europay (EMV) Chip

Your credit card contains a tiny chip called an EMV chip. Its main job is to verify the card information and generate a special code for each credit card transaction. This makes it challenging for thieves to copy your credit card.

Expiration Date on Credit Cards

You have a limited time to use the credit card that was issued to you. On your credit card, the month and year of expiration are both listed.

Signature Box

The credit card has a signature box on the back where the cardholder must legally sign the document.

CVV Number

A credit card’s three-digit Card Verification Value (CVV) number can be found there. It serves as an additional layer of security, particularly when conducting online transactions.

The Best Credit Card: How to Choose

Selecting the best credit card is an opinion-based process because consumer credit needs and lifestyle habits vary. To make your search for the best credit card easier, keep in mind the following important tips:

  • Consider your lifestyle and spending habits. 

It is ideal if your credit card matches your way of life. Lenders now provide credit cards with specialized features for a range of lifestyle needs, from shopping to travel. Never forget that the rewards you can receive depend on the type of card you choose. A travel credit card, for instance, might be the best option if you frequently fly since you can take advantage of travel benefits like priority boarding, hotel discounts, lounge access, etc.

  • Examine the Fees and Charges 

There are fees and charges associated with credit cards. To give one example, if you don’t pay your monthly credit card bill in full or on time, a fee will be assessed. Similarly, you also have to pay annual and renewal fees for a credit card. Before applying for a credit card, you should compare these numbers because they differ from lender to lender.  

  • Evaluation of the Lender’s Reward Program –

 This clarifies whether the rewards will be given in flyer miles, points, or cashback. To determine which rewards program is best for you, compare the suggested reward structure with your spending patterns and way of life. In a similar vein, it’s crucial to have access to the rewards redemption process because some lenders may only permit this at partner websites or shops.

  • Check the Available Payment Methods 

A credit card with a challenging payment method is not something you would want. Choosing a card that supports multiple payment methods will help you make sure your credit card debt is paid off quickly.

  • Look for Add-On Benefits –

Take a look at the other credit card add-on benefits, such as welcome bonuses and discounts at shops and eateries. Doing so will help you maximize the rewards offered.


How to Use Credit Cards to Build Credit

Regular, non-secured, and secured cards can all help consumers establish a solid credit history with responsible use while also giving them access to online shopping and removing the need to carry cash.

Since the major credit bureaus receive information about payments and purchase activity from both types of credit cards, cardholders who manage their accounts responsibly can increase their credit scores, possibly extend their available credit lines, and—in the case of secured cards—possibly upgrade to a regular credit card.

Making consistent, on-time payments, avoiding late payments, maintaining a low debt-to-income ratio, and keeping credit utilization below your credit limit are all important components of establishing a solid credit history.

A consumer’s credit score will rise as a result of making responsible purchases and repaying them on time, increasing their appeal to other lenders.

How can I get a credit card if I don’t have any history?

It can be a bit of a catch-22 to establish a credit history. Since you are an unproven borrower if you have no credit, businesses and banks are less likely to give you credit.

Opening a secured credit card is one of the easiest ways to get started. There is little risk for the lender because spenders are only borrowing from the money they put down as a deposit, and it gives them an overview of your spending and repayment habits.

Becoming an authorized user on an established credit account, such as a parent or spouse, is another way to begin building credit. Your account will show the cardholder’s credit history, giving your credit report more longevity.

However, if you choose to partner with someone, make sure they have sound credit practices because their financial decisions will also reflect on you.

Are the annual percentage rates (APRs) on credit cards fixed or variable?

Both types of annual percentage rates (APRs) are common for credit cards.

Reading the cardholder agreement that comes with your credit card will help you determine the type of APR you have. Legally, credit card companies are required to state the type of APR they have and what it is. Customers must be informed if a fixed APR changes.

Check the fine print on your credit card to make sure the APR isn’t fixed for purchases but variable for cash advances or late payments.

What is an annual credit card fee?

The cost that the credit card issuer levies to grant you a credit card is known as the annual fee. Some credit cards do not impose an annual fee, but others—usually those that provide rewards or incentives like cash back may levied annual fees ranging from $50 to $700.