Credit Card Basics
The Credit card is the most divisive financial tool available. There are a lot of groups of people with mixed responses on credit cards, some find it mighty useful and some consider that credit cards are embodiment of pure evil. In reality, Credit card is nothing but a tool. Whether its effects are harmful or useful, it depends on the individual using it and the way he chooses to use it.
If you talk about the history of Credit cards, they started out as Simple and Standard. Each Card issuer had one card with same set of features. Today credit cards come in multiple ranges with varying features, interest rates, annual fees etc. It's important an individual knows what kind of Card will suit his/her lifestyle and financial situation.
A brief description of various kinds of credit cards is as follows:
Standard Credit Cards: These are the most common kind of credit cards. They do not require a security deposit to prove that the loan can be repaid. The way the Annual percentage Rate (APR) is offered or calculated on a standard credit card can vary. Two examples are:
- â€˘ Balance transfer Credit cards: Balance transfer credit cards allow consumers to transfer a high interest credit card balance onto a credit card with a low interest rate. In the market today, we have Balance transfer credit cards with an initial annual percentage rate (APR) of 0%. The terms of balance transfer credit cards varies between offers, so be sure to thoroughly read the terms and conditions for each card.
- â€˘ Low interest Credit cards: Low interest credit cards offer either a low introductory APR that jumps to a higher rate after a certain period, or a single low fixed-rate APR. Low interest cards can be very useful when consumers need make a large purchase because it allows several months to a year to pay it off with very low or no interest.
Reward Cards: A rewards card can be beneficial for the right kind of user. You can earn free airline tickets, hotel stays, cash back, gift cards and even novelty vacations -- there's no shortage of potential perks awaiting a rewards cardholder.
Before choosing any reward card, however, one needs to consider his Credit card spending tendencies. Ask yourself: Are you someone who regularly pays the full monthly balance, or do you carry a balance from month to month? The interest rate with a rewards card is quite higher when compared to typical Credit cards, so itâ€™s an important distinction. If you occasionally carry a balance, it is advised to not go for a rewards card. High interest rates coupled with late fee penalties will mean you will end up losing heavy money while chasing petty rewards.
However, if you pay your credit card bills regularly and choose a card that caters to your buying taste, a rewards card can be a great choice. After all, who doesnâ€™t love a gift?
To take full advantage of a Credit card, select one whose reward structure matches your lifestyle.
Different types of reward cards are as follows
Cash Back: This type of credit card allows you to earn cash rewards for making purchases. The more the card is used, the more cash rewards you receive. Most cash back cards earn users around 1 percent of total purchases. I.e. you typically earn cash back worth Rs 100 on purchases of Rs 10,000. Some cards offer a higher cash back percentage with increased usage; others offer a higher cash back percentage at select merchants or for particular types of purchases. E.g. ICICI once offered 5% cash back on purchases at Westside with a minimum purchase of 3,000. Since cash back programs are costly to credit card companies, some of these cards have an annual fee that can vary from Rs. 500 to Rs 3,000
Examples: Citibank Cash Back Credit Card, Shopping Rewards Card.
General Reward Point Credit Cards: In Reward points Cards, cardholders can accumulate points towards a reward structure, which is based on how much the card is used over time. E.g. Cardholder is awarded is 1 reward point for each rupee he spends. There are certain Bonus spend rewards as well for certain annual spending such as:
| Annual Spends
|| Bonus Reward Point
| Rs. 2 Lakh
| Rs. 3 Lakh
| Rs. 4 Lakh
| Rs. 5 Lakh
SBI signature contactless card bonus reward points
Hotel/Travel Point Credit cards: This is a genre of credit cards specific to hotels and travel. Some cards are co-branded with hotels. These credit cards allow you to earn points for all purchases, in addition to bonus points for dollars spent on stays at the respective hotel chain. You can redeem your points for free nights and upgrades at the hotel chain your card is co-branded with.
Then there are broader hotel and travel cards with which points can be redeemed for travel, theme park admission, stays at major hotel chains and more.
Examples of this kind of Card are "Yatra SBI Card" and American Express make my trip Card.
Gas Cards: Gas Cards with points or rebate have a high reward structure for Fuel purchases/Car maintenance. If you drive a lot, consider a gas card for more points on gasoline purchases. Gas cards come in two species: general and brand-specific. General cards treat all gas companies equally, while brand-specific cards favor one gas company. A general gas rebate card, for example, may give you 1 percent cash back for general purchases but rewards you with 5 percent back for buying gas or having auto maintenance done at any company. A gas-company-specific card, in contrast, will give you a 1 or 2 percent rebate for regular purchases, but you will earn 5 percent rebate only when buying gas at that company's gas stations.
Ex: Indian Oil Citibank Platinum Credit Card saves over 5% on your fuel bills. It gets you Reward Points that collect quickly, and convert easily to free fuel. Collect points on all purchases, and 4 times the points on fuel and hundreds of lifestyle purchases.
Airline Miles/ Frequent flier credit cards: There is a subset of reward cards specifically for air travel. This type of card allows consumers to earn airline mile credits whenever they make purchases. Some cards are co-branded with a specific airline, while some are generic and can be redeemed for tickets with a variety of airlines. Points can be redeemed for airline travel, much like frequent flier miles.
Airline Specific Credit Cards: JetPrivilege HDFC Bank World Credit Card
Generic Airline Miles Cards: Complimentary Citibank PremierMiles Credit Card
Secured Credit Cards: Secured credit cards require a security deposit for approval. These cards are useful in reestablishing the credit score. The cards have an annual fee and higher annual interest rates. Most often, these cards are used to reestablish credit. A person can use the card to make small purchases that they can easily repay. Getting a card with a conversion option makes it easier to switch to a standard credit card, which should be possible after several months of good payment history.
Specialty Credit Cards: These types of cards are for consumers with unique needs for their credit use, such as business professionals and students. These credit card programs are designed specifically to meet the needs of those individuals.
- â€˘ Business Credit Card: These cards are available for business owners and executives and have many of the same features as traditional credit cards: low introductory rates, cash back programs and airline rewards. The difference is these cards come with many additional benefits and perks exclusively for those in the business world.
Some of these bonuses include: Business expenses kept separate from personal expenses; special business rewards and savings; expense management reports; additional cards for employees; and higher credit limits.
Every credit card is a bit different and promotional offers often change, so be sure to thoroughly look over the terms and conditions for each specific card before applying. Example: SBI Platinum Corporate Card
- â€˘ Student Credit Cards: Many college students need a credit card, but they generally have little or no credit history, which makes it difficult to get approved for a traditional card. Student credit cards are specifically designed for those enrolled in accredited four-year colleges and universities to help them build a credit history from the ground up.
Compared to consumer credit cards, student credit cards are often scaled back somewhat in terms of rewards features and other benefits, but they can still be a valuable commodity. If used wisely, a student can take the first step toward building a solid credit history with this type of credit card. Once they've proven financial responsibility, it will be much easier to qualify for reward cards and higher credit lines. Example: SBI ADVANTAGE Plus card.