What is a Credit Card

What is a Credit Card

You may wonder “What is a credit card”

“How is a credit card different from an ATM card or a Debit Card”

“How to apply for a free credit card”

You are not the only one who has this question.  After the recent demonetization in India, many people in India are looking for digital payment options.

Credit Card is one such digital payment option.  It is very similar to your Bank ATM Card or Debit Card but the way it works is fundamentally different.

You’ll find the answers to all your questions on Credit Card in this article.

What is Credit

The English word “Credit” means “Trust“.

Credibility” means “Trust Worthiness” of a person or a thing.

When you go to a grocery store in your street, buy some groceries and say that “I’ll pay tomorrow because it’s a month end and I don’t have any money.  I’ll pay you when I get the salary next month”.  

The store owner may say yes because he knows you for the last 20 or 30 years.  Moreover, he knows that you, your father and your grandfather have been living in that street for many many years.  The grocery store owner knows that you’ll not run away tomorrow.  He trusts you and your family.

This is called “buying something on credit”.

 

A Problem

Now, what if you move to a new city like Bangalore, Pune or Noida after your college education to start your career?

The Reliance Fresh or Big Bazaar in your new city, don’t know who you are and where you live.  They’ll not give you any grocery based on “trust” or “credit”, like how the grocery store keeper in your home town trusted you.

So what you do at the month end, if you don’t have any money to shop for your groceries in a new city far away from your home town ?

You can go to a bank and say “Please give me a loan of Rs.5,000 and I’ll pay you back in 10 days, when I get my salary next month”

The bank will not agree to give you this loan for the following reasons.

It is not very efficient for the bank to process your application for Rs.5000 loan for just 10 days.  They’ll not earn any huge interest by lending you this very small amount for just 10 days.  Plus, it will take more bank staff to manually process many such applications from many people like you at the end of each month.

To solve this problem, the banks have come up with what is called a “Credit Card”.

 

What is a Credit Card

Credit Card is actually a loan. It is a very small loan from the bank.  It can vary anywhere from Rs.50,000 to 1Lakh to 2Lakhs.  This loan amount is called the “Credit Limit” of the Credit Card.

What is a Credit Card?

A credit card is an interest free loan from the bank, not in the form of a cash or a cheque but in the form of a card. The bank gives you this free loan for about a month, so that you can buy anything you want from any store, using the loan amount.  You pay back the loan to the bank only in the next month or after 30 days.

When the bank gives you a credit card, you can go to any store in your new city and buy anything for one month without paying anything for about a month.  You need to pay the loan amount you spent back to the bank.

This is what is called the “Credit Card Bill” that you pay at the beginning of the next month when you get your salary.

The bank basically “trusts” you that you’ll pay back the money for all your purchases at the end of one month.

This is how credit cards work.

 

Difference between Credit Card and Debit Card

When you buy something in a store and pay using your debit card or the ATM card, the money from your savings account is immediately debited or subtracted from your balance amount.

However, when you use a credit card to buy something in a store, your money in the savings account or the salary account will not be affected.  The bank which gave you the credit card will pay the store owner for what you purchased at the store.  You’ll pay the bank only in the next month.

This is because you are paying using the “small loan” or the “Credit” the bank gave it to you in the form of a “Credit Card”.  It is actually not your money but bank’s money.

 

Conclusion:

I hope this article helped you to understand your question on “What is a Credit Card”

If you liked this article or you have more questions, please let us in the comments below.

 

Also Read:

How to apply for a credit card

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