Introduction to Banking
What is a Credit Card?
A credit card allows someone to borrow money from a bank for purchasing products/services. The bank approves a line of credit to its customers through a credit card which is the amount that the customer can borrow from the bank. The payment can be returned to the bank over a period of time. Through a credit card, the bank approves a credit limit to each customer based on factors such as the credit score, repayment capacity, previous history with the bank, etc. The customer is at liberty to use the credit card up to the amount mentioned in the credit limit.
A statement is issued for a credit card every month which contains the total amount, the payment date, and a minimum amount. In case a customer fails to pay the total amount, the bank levies interest on the outstanding amount. The interest rate varies from one bank to another and can be different for different credit cards issued by the same bank.
Every customer has a credit score which reflects the financial health of the customer. Timely payment of credit card bills helps to build a positive credit score, however, missing out payments can affect it negatively.
Usually, each bank has a variety of credit card products that differ from each other in terms of features. Some might provide better reward points on shopping while others may provide airline mileage. For example, Kotak Mahindra Bank offers 20 different kinds of credit cards to its customers. Customers should compare the features of different cards and choose the one that suits their needs.
Terminology related to Credit Cards
Credit Limit: Credit limit refers to the maximum amount approved by the bank for a certain credit card. A customer can use the credit card up to this amount only. For example, if the credit limit of a card is ₹ 100,000, a customer can use the card up to ₹ 100,000 only.
Total Amount Due: This refers to the total amount owed by the customer to the bank. A customer can choose to pay the full amount or a part of the same to the bank at any point in time. The bank levies interest on the portion of the total amount which is not paid back to the bank on the payment due date.
Minimum Amount Due: This is the amount that a customer has to compulsorily pay to the bank on the due date. Usually, the minimum amount is 5% of the total amount due. While the customer may or may not pay the entire amount due to the bank, the minimum amount has to be paid back. This is not an optional amount.
Payment Due Date: This refers to the last date by which the payment has to be made to the bank for a given statement.