Credit Card: How to choose the most rewarding credit card in India

In India, the demand for credit cards is rapidly increasing. This is evident from a recent PwC report forecasting that the total number of credit cards will reach 200 million by 2028-29, driven by a CAGR of 15%.

It comes as no surprise then that the market is flooded with credit card options. For those looking forward to applying for a credit card, it is therefore crucial to learn the fundamentals, advantages, and functionality of these instruments before choosing one. There are a wide range of banks and non-banking financial companies (NBFCs) as well as digital lenders, who offer credit cards of all kinds. Applying for one is easy and entirely paperless. Many lenders also provide segment-specific and tailored options, including co-branded cards.

What is a credit card?

A credit card is a small, plastic or metal card issued by banks or financial institutions. It lets you borrow money to pay for goods and services at merchants, who accept these cards. You need to repay the total outstanding or at least the minimum amount due, by the due date. Beyond the free credit period the card issuer levies interest charges on the outstanding balance. You can use your credit card at any place that accepts it, and businesses usually display signs indicating the card networks they accept.

How does a credit card work?

When you use your credit card, a transaction amount is charged to your credit card account. Every month, a statement detailing all your purchases, fees and the total amount due will be sent to you. To prevent late fines and interest charges, you must pay at least the minimum amount before the due date.

You will not be charged interest if the entire amount is paid by the due date. However, interest will be charged on the outstanding amount if you choose to pay less than the total due. Credit card interest rates can differ based on the card issuer and type of credit card. So, it’s very important that you understand the annual interest rate on your card.

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Credit card basics

When it comes to credit card basics, here’s what you need to know:

• Credit limit: The maximum amount you can use on a credit card is known as the credit limit. The card issuer determines your credit limit based on your creditworthiness, which is based on factors such as your income, credit history and credit score. Use your card within the available credit limit to avoid over limit charges.


• Credit card balance: The credit card balance refers to the total amount you have used on your credit card. This may include the purchases or other transactions made with the credit card, fees, any cash advance and interest charges.


• Billing cycle: Generally the credit card issuers follow a billing cycle of 30 days. The credit card billing cycle refers to the duration between two billing statements. This duration may differ depending on the month and the card issuer.


• Minimum amount due: The minimum payment to be made is the amount that you must pay to avoid late fees. It is a small percentage of your total outstanding and EMIs, if any. Your monthly credit card statement will carry the minimum due amount. It is advisable to pay at least the minimum amount due, because failing to do so would result in late payment charges as well as a negative impact on your credit score.


• Interest rate: Credit card interest rates may differ depending on the card issuer. The interest rates on credit cards are charged on the total outstanding amount. The interest rates can go up to 50% per annum. The credit card issuers use the annual percentage rate (APR) and monthly percentage rate (MPR) to calculate interest charges on your credit card outstanding. APR is the yearly interest rate charged on credit card dues. On the other hand, the MPR is applied to calculate the monthly dues. The credit card issuers use a simple formula to compute the interest component: (Number of days from the date of transaction x outstanding dues x interest rate per month x 12 month)/365.


• Fees and charges: Credit cards may have certain costs associated with them. Make sure you read the terms and conditions of your credit card carefully to be aware of all possible costs. For certain cards you may incur costs like joining fee, annual fees, late payment fees, over limit charges, card replacement fees, cash advance charge and EMI conversion fee, among others.

Credit card benefits

Credit cards provide a range of benefits that enhance your lifestyle. Credit cards are not only useful when you want to preserve your cash, but also become crucial in financial emergencies.

• Building credit history: Using a credit card responsibly can help build and improve your credit history. Your credit score can be improved by making on-time payments and keeping your balance low in comparison to your credit limit.


• Rewards and cashback: Many credit cards offer rewards programmes, which allow you to earn points, cashback or other benefits for each purchase. You can redeem these rewards for travel,merchandise and for certain transactions.


• Convenience: Credit cards are widely accepted and offer a convenient way to make purchases without the risk of carrying cash.


• Emergency funds: Credit cards can serve as a safety net in emergencies when you may not have immediate access to cash. This can be particularly helpful while dealing with unexpected expenses or urgent situations.

Using platforms like Moneycontrol, you can effortlessly check your credit score and explore, compare, and apply for a suitable credit card as per your needs.

Types of credit cards in India

In India, various types of credit cards are available to cater to  specific lifestyle needs like travel, shopping etc.

• Cashback Credit Cards: These cards let you earn a percentage of your spending back. Flat-Rate Cashback Cards offer a consistent cashback rate on all purchases, while Tiered Cashback Cards vary rates based on purchase categories.


• Lifetime Free Credit Cards: There are no annual fees or joining charges on such cards. They also generally come with attractive offers  and rewards programs.


• Reward Points Credit Cards: You can earn  points on your spends, which can be redeemed for  cash or a catalogue of products and services. Some cards also allow using points to pay for recent transactions.


• Travel Credit Cards: Designed for frequent travellers, these cards offer reward points for travel-related purchases which are redeemable for future travel expenses.


• Fuel Credit Cards: They offer rewards or cashback on fuel purchases from partner petrol stations. They also offer a fuel surcharge waiver.


• Premium Credit Cards: These cards provide luxury perks like golf course access, airport lounge access, dedicated concierge, and dining discounts, often at a high annual fee. They may also have more stringent issuing criteria.

Choosing the right credit card

Choosing the best credit card can be a daunting task due to the availability of a plethora of options. To arrive at a decision, here are a few key points to consider:

• Assess your needs: Shortlist the features you want in a credit card, such as low interest rates, reward points, movie offers, cashback or anything else.


• Compare offers: Compare various credit card deals, and carefully review factors such as fees, reward programmes and incentives. For example, on some cards you can enjoy discounts on booking movie tickets and events, while some cards may be offering complimentary flight tickets. Certain co-branded credit cards offer regular discounts on products from top brands.


• Examine the terms and conditions: Examine the credit card’s terms and conditions carefully before finalising it. Take note of specifics such as annual charges, late fees, interest rates and rewards redemption policy.


• Check your credit score: Your credit score can impact credit card offers available to you. You can get better credit card benefits with a higher credit score. Check your credit score before applying to see which cards you may be eligible for. Applying for a credit card generates a hard inquiry with the credit bureau which can affect your credit score.

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Managing your credit card responsibly

To take advantage of credit card benefits, use it wisely:

• Make timely payments: Pay your credit card bills on time to prevent late fees and possible harm to your credit score. Set up automated payments to make sure you never miss a deadline.


• Maintain low balances: When it comes to your credit limit, maintain a low credit card balance. Excessive spending might lower your credit score and result in high interest charges.


• Avoid unnecessary debt: A disciplined approach to using credit cards can be financially rewarding. Avoid using credit cards to the maximum limit or beyond the ideal utilisation ratio amount. It’s advisable to utilise the card only up to the amount you can repay without delay. Also, a low credit utilisation ratio, i.e, one that is less than 30% of your credit card limit, helps in improving your credit score.


• Monitor your statements: Regularly review your credit card statements for any errors or unauthorised transactions. Report any discrepancies to your card issuer promptly.

Conclusion

Understanding all aspects of a credit card can help you use it effectively and enjoy the credit card benefits. From knowing the credit card basics to choosing the right card, being informed will empower you to take control of your finances.

To find credit card offers tailored to your needs, visit the credit score dashboard on Moneycontrol.