Credit cards: Benefits, Risks, Interest Rates, No-Cost EMIs

A credit card is a financial tool that allows you to borrow money up to a certain limit to make purchases or withdraw cash. You repay the borrowed amount, usually with interest, within a specified period.

Eligibility

Eligibility criteria vary by issuer, but common requirements include:

  • Age: Typically 18 or older
  • Income: Proof of a stable income or employment
  • Credit History: A good credit score is often required
  • Residency: Must be a resident of the country where you’re applying

Required Documents

When applying for a credit card, you may need:

  • Proof of identity (e.g., passport, driver’s license)
  • Proof of income (e.g., pay stubs, tax returns)
  • Employment verification
  • Address proof (e.g., utility bill, lease agreement)

How to Apply

Step 1: Check Your Eligibility

Before applying, check if you meet the following requirements:

  • Age: Usually 18+ (some banks require 21+ for premium cards).
  • Income: Varies by card type; premium cards require higher income.
  • Credit Score: 700+ recommended for better approval chances (some cards allow 650+).
  • Employment: Salaried, self-employed, or business income is considered.

Step 2: Choose the Best Credit Card for You

There are several types of credit cards,

  • If you travel a lot, go for an Airline or Travel Rewards Credit Card.
  • If you love cashback, pick a Cashback Credit Card that fits your spending.
  • If you carry a balance, a 0% Intro APR or Low-Interest Card is best.
  • If you own a business, a Business Credit Card offers great perks.

Step 3: Apply Online or In-Person

  • Visit the bank’s website or a credit card comparison site.
  • Fill out the application form with your personal details, income, and employment info.
  • Submit required documents (ID, income proof, etc.).
  • Wait for approval (instant for some cards, or a few days for others).

Step 4: Submit Required Documents

  • ID Proof (Passport, Aadhaar, PAN, etc.)
  • Address Proof (Utility bill, rental agreement, etc.)
  • Income Proof (Salary slip, ITR, or bank statements)
  • Credit History (Some banks fetch it automatically)

Step 5: Approval & Card Issuance

  • Processing takes a few days to 2 weeks.
  • Once approved, activate the card and start using it wisely—pay bills on time to avoid interest and debt.

How is the Credit Card Limit Determined?

The credit limit is influenced by several factors:

  • Income: Higher income usually results in a higher limit.
  • Credit Score: A higher score indicates lower risk to lenders.
  • Credit History: Longer, positive credit history can lead to higher limits.
  • Debt-to-Income Ratio: Lenders assess how much debt you have compared to your income.

Can You Buy Anything with a Credit Card?

In general, credit cards can be used to purchase a wide variety of goods and services, including:

  • Everyday purchases (groceries, gas)
  • Online shopping
  • Travel expenses (flights, hotels)
  • Large items (electronics, furniture)

No-Cost EMI Benefits

No-cost EMI allows you to pay for a product in installments without additional interest costs. Here’s how it works:

  • The seller may absorb the interest or offer a promotional term.
  • You pay the principal amount in equal monthly installments.

Calculation for a $600 TV with No-Cost EMI

If you buy a TV for $600 and convert it to a 12-month no-cost EMI:

  • Monthly Payment: $600 / 12 = $50 per month
  • Total Interest: $0 (because it’s no-cost EMI)

Credit Card Interest Rates

  1. Annual Percentage Rate (APR): This is the yearly interest rate charged on outstanding balances. It varies based on the card and your creditworthiness.
  2. Types of APR:
    • Purchase APR: The rate applied to purchases made with the card.
    • Cash Advance APR: Typically higher than the purchase APR, this rate applies when you take out cash using your card.
    • Balance Transfer APR: This rate applies to any balances transferred from another credit card.

When Interest is Added

  1. Grace Period: Most credit cards offer a grace period (usually 21-25 days) during which you can pay off your balance without incurring interest. To benefit from this:
    • You must pay your balance in full by the due date.
    • The grace period applies only to new purchases, not cash advances or balances transferred.
  2. When Interest Accrues:
    • After the Grace Period: If you do not pay your balance in full, interest will be charged on the remaining balance.
    • Cash Advances: Interest usually begins accruing immediately, with no grace period.
    • Balance Transfers: Depending on the card, interest may accrue immediately or after a specific promotional period.

Do You Need to Pay Interest on All Transactions?

Partial Payments: If you only make a partial payment, interest will be charged on the remaining balance and potentially on new purchases if the grace period is affected.

Not If You Pay in Full: You will not incur interest on new purchases if you pay off your balance in full during the grace period.

Example of Interest Calculation

If you have a $1,000 outstanding balance and an APR of 20%, here’s a simple calculation:

  • Monthly Interest Rate = 20% / 12 = 1.67%
  • Monthly Interest = $1,000 × 1.67% = $16.67

Payment of Bills

  • Due Date: Credit card bills are typically due monthly, and it’s crucial to pay by the due date to avoid late fees and interest charges.
  • Minimum Payment: You must pay at least the minimum amount due to avoid penalties.

Consequences of Not Paying

  • Late Fees: If you miss a payment, you may incur late fees.
  • Interest Accrual: Interest will accumulate on your outstanding balance.
  • Credit Score Impact: Non-payment can negatively affect your credit score.
  • Debt Collection: The issuer may send your account to collections after prolonged non-payment.

Pros of Using Credit Cards

Using credit cards offers several benefits, including the ability to build a positive credit history, earn rewards like cash back and travel points, and enjoy the convenience of widespread acceptance for purchases. They also provide emergency funding for unexpected expenses and often include purchase protection features for added security.

  • Builds Credit: Helps establish a good credit score with responsible use.
  • Rewards: Earn points, cash back, or travel benefits on purchases.
  • Convenience: Widely accepted for both online and in-store shopping.
  • Emergency Access: Provides a safety net for unexpected expenses.
  • Purchase Protection: Offers fraud protection and warranties.

Cons of Using Credit Cards

While credit cards offer benefits, they also come with drawbacks. High-interest rates can lead to significant debt if balances are not paid in full. Additionally, the ease of spending may encourage overspending, and missed payments can negatively impact credit scores. Various fees, such as annual and late payment fees, may apply.

  • High-Interest Rates: If you carry a balance, the interest can accumulate quickly, leading to significant debt over time.
  • Potential for Overspending: Easy access to credit can encourage impulsive spending and make it easy to accumulate debt.
  • Fees: Credit cards can come with various fees, such as annual fees, late payment fees, and cash advance fees.
  • Credit Score Impact: Missing payments or carrying high balances can negatively affect your credit score, making it harder to secure loans in the future.
  • Complex Terms: Credit card agreements can be complicated, with varying interest rates and fees that may be difficult to fully understand.
  • Fraud Risk: While many cards offer fraud protection, the risk of identity theft and unauthorized transactions still exists.
  • Debt Cycle Risk: If not managed properly, users can fall into a cycle of debt, leading to financial stress and difficulty in managing other expenses.

Alternatives to Credit Cards

People who use credit cards often feel good about the convenience, rewards, and financial flexibility they provide. They appreciate the security features that protect against fraud and the ability to build credit. However, on the downside, many experience anxiety over accumulating debt, high-interest rates, and the temptation to overspend.

As for alternatives with less risk, there are several options:

  1. Debit Cards: Linked to a bank account, they allow spending only what you have, reducing the risk of debt.
  2. Prepaid Cards: These cards are loaded with a specific amount of money, helping users stick to a budget without the risk of overspending.
  3. Buy Now, Pay Later (BNPL): These services allow for installment payments without interest if paid on time, although late payments can incur fees.
  4. Cash: Using cash for purchases can help manage spending and avoid the pitfalls of credit.
  5. Personal Loans: For larger purchases, a fixed-rate personal loan may offer a more structured repayment plan without the risks associated with credit cards.

Each alternative has its own pros and cons, but they can provide more control over spending and help avoid the pitfalls of credit card debt.