Credit Card Basics – 1

Namaskar,

I would like to explain few basics if Credit Card which are not very well understood by consumers.

1. What is a Credit Card ?
A credit card often referred to as plastic money, is a card, which is handy to carry and use for shopping or buying goods and services. You use your card to BUY a pair of shoes. You now owe the credit card company the amount paid at shoe store which will be billed to you, at a regular time interval, usually 30 days. More detaisl available here.

2.How is Credit Card different from a Debit card ?
A debit card is authorized only if their are sufficient funds in the account. While on credit card it depends on the cerdit line the issuing company has provided you. The basic difference is in debit card, you pay your own money and in acse of credit card, the issuing company pays for you to whom you have to pay later.

3.What’s the difference between secured credit cards and unsecured credit cards?
Secured credit cards
are usually given to those with bad or no credit history. A deposit is made, say Rs5000, which gives the customer Rs500o limit. The customer isn’t allowed to spend more than the amount of the deposit. As the deposit decreases, so does the amount the customer is allowed to “charge”. That’s why these cards are sometimes called prepaid credit cards, or bad credit credit cards(In Western countries, every individual has a credit history, will come to India soon. A person with bad credit history is known to have “bad cerdit”) An unsecured credit card is granted to those with a good credit record, because they have a history of paying their bills on time.

4. How are my credit card finance charges calculated?
This is something you need to check out before you apply for a credit card. There are three basic ways finance charges are calculated, and they range from favoring you to favoring them. That’s why you need to know what method they use.
The first method is the Adjusted Balance method, where the balance on your previous statement is added to any charges. Then any payments you’ve made are subtracted, and the result is multiplied by the interest rate. This method is the most favorable for you.The second method works out fairly even. It’s called the Average Daily Balance method, with charges and payments being added and subtracted as they occur. Then, at the end of the statement period, these charges are averaged, with that average being multiplied by the interest rate.
The other method, which will cost you the most, is called the Previous Balance method. The balance on the previous statement is first multiplied by the interest rate, then your charges and payments are calculated. With this method, in effect, you’re paying interest on the same amount twice.

5.My credit card has been stolen – what should I do?
Stealing credit cards is a huge business these days. Credit card fraud is at an all-time high, with identity theft at the source of most stolen credit cards. The first thing you need to do when you discover you don’t have your card is call your credit card company. They’ll immediately cancel your card so no one else can use it. (Always keep the number to call your credit card company in a safe place)
If you’ve acted quickly, there probably won’t be any changes on it. But if it’s taken a while to realize your credit card is gone, then your identity may have already been stolen, with the criminal making charges in your name.

6. Am I liable to pay for charges not authorized by me because of stolen credit cards ?
This is a tricky question. Some cards put your liabaility at Rs500. Most others don’t. They hold you accountable for charges made by others. This is only seen in India. In the US, if you call the company and tell them that your card is stolen, then you have no liablity on fraudalent charges. However, in India, our own financial institutions make their own customers scapegoats and haress them. I strongly object to these practices by Indian banks/FIs along with VISA, MasterCard & AMEX.

7. What’s a balance transfer?
A balance transfer is used as an advertising tool by credit card companies. To persuade you to use their credit card, they’ll offer to pay off any existing cards you have, and add the balance to a new card with their company.
Visa, MasterCard, and American Express, the big three of credit card companies, are constantly competing for your business by offering balance transfers at reduced interest rates.

8.What are pre-approved credit cards?
This is another method credit card companies use to get your business. They get a list from a CRA (credit reporting agency), or employers or Luxury car woners, of people who have good credit records and favorable payment histories(Mobile Bills, Club Memberships etc).
These people have a history of paying their debts, so they become prime targets for pre-approved credit card offers. In effect, that’s exactly what the credit card company’s done – they know you’ll pay, so they’ve already approved your application. And to further entice you, they’ll usually offer you a low interest credit card. But watch that interest rate – it could go back up within a short period of time!

9.Do credit cards have hidden costs?
Generally, credit cards don’t have hidden costs. What they do have is extra charges, such as application fees, annual fees or late fees. Although these fees aren’t hidden, you need to read the entire “Terms & Conditions” that comes with your credit card – all the fine print – to be aware of these charges.

10. Can I get a credit card if I’m under 18?
You can’t legally have a credit card in your name if you’re under 18, but there are other ways to get one. You can get a prepaid credit card, or a secured credit card. Or you can get a parent or legal guardian to get a credit card on their account, with your name on it. That’s a great way to start building a good credit record.
If you’re a student, 18 or over, you can get a student credit card. That’s also a good way to start working towards establishing a positive financial picture.

Comments and Critics are welcome.

Aap Ka Apna,
CardBhai – Friendly Credit Card Advisor.

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