Credit cards explain

07/December/2025 22:41 Share:

CREDIT CARDS — Detailed Notes

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1. Meaning and Definition of Credit Card

A credit card is a plastic or digital card issued by a bank or financial institution that allows the cardholder to borrow funds up to a pre-approved limit to pay for goods and services at merchants or withdraw cash. It is a short-term unsecured loan repayable by the cardholder within a specified period.

Formal Definition

According to RBI:

> “A credit card is a payment card that enables the cardholder to purchase goods and services on credit, repayable either in full or in installments.”

In simple words

A credit card allows you to buy now and pay later.

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2. Why We Need a Credit Card

1. Convenience – Cashless transactions at shops, online, and international payments.

2. Emergency Access to Funds – Temporary borrowing for urgent needs.

3. Credit History Building – Helps in creating a good credit score.

4. Rewards & Benefits – Cashback, reward points, travel miles, and discounts.

5. Purchase Protection – Insurance on purchases, fraud protection.

6. Global Acceptance – Can be used internationally.

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3. How Credit Cards Work

Credit cards work in a simple step-by-step manner:

1. Card Issuance – Bank evaluates income, credit history, and assigns a credit limit.

2. Usage – Cardholder uses the card at a merchant or ATM.

3. Authorization – Merchant contacts the bank; transaction approved if within limit.

4. Billing Cycle – Bank generates monthly statement with minimum payment due.

5. Repayment – Cardholder pays full amount or minimum payment; unpaid balance accrues interest.

6. Credit Limit Restoration – Once repaid, available credit is restored.

Example:

Credit limit: ₹1,00,000

Purchase: ₹30,000

Remaining credit: ₹70,000

Repayment due: ₹30,000 by statement date

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4. Types of Credit Cards

A. Based on Credit Limit / Tier

1. Standard Credit Card – Basic features, moderate limit

2. Gold Credit Card – Higher credit limit, reward points

3. Platinum / Premium Card – Exclusive benefits, high limit

B. Based on Usage

1. Retail Credit Card – For shopping, online purchases

2. Corporate / Business Credit Card – For business expenses

3. Travel Credit Card – Flight bookings, hotel reservations, air miles

4. Fuel Credit Card – Cashback on fuel purchases

C. Co-Branded Credit Cards

Partnered with airlines, e-commerce, or retail stores

Example: SBI Card – Flipkart, HDFC – Amazon

D. Virtual Credit Cards

Digital-only card for online transactions

One-time or limited-use numbers

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5. Advantages of Credit Cards

1. Convenience – Eliminates need for cash

2. Short-term Finance – Buy goods now, pay later

3. Build Credit Score – Timely repayment improves creditworthiness

4. Safety – Protected against theft, fraud, or loss

5. Rewards & Offers – Cashback, discounts, points

6. Global Acceptance – Can be used internationally for purchases and travel

7. Emergency Loans – Instant funds in critical situations

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6. Limitations / Disadvantages of Credit Cards

1. High Interest Rate – Carrying balance attracts high interest

2. Debt Trap – Overspending can lead to heavy debt

3. Hidden Charges – Annual fees, late payment charges, over-limit fees

4. Credit Score Risk – Defaults reduce creditworthiness

5. Fraud Risk – Card misuse if information is leaked

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7. Importance and Principles of Credit Cards

Importance

Enhances financial inclusion

Promotes digital payments and cashless economy

Provides liquidity and financial flexibility

Useful in emergencies and travel

Encourages disciplined repayment if used responsibly

Principles

1. Credit Limit Principle – Usage within assigned limit

2. Repayment Principle – Full or minimum payment obligation

3. Interest Principle – Interest applies on unpaid balances

4. Security Principle – Cards issued after KYC verification

5. Transparency Principle – Clear terms for fees, interest, and rewards

6. Acceptance Principle – Widely accepted at merchants globally

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8. Real-Life Examples & Case Studies

Case Study 1: SBI Card – Advantage Plus

Provides cashback on Amazon purchases and groceries

Example: Customer spends ₹20,000 → earns ₹400 cashback

Encourages digital payments and loyalty

Case Study 2: HDFC Bank Regalia Credit Card

Premium card offering lounge access, travel insurance, and reward points

Corporate executives use it for travel and expense management

Improves corporate efficiency and financial tracking

Case Study 3: Credit Card Misuse Scenario

A person overspends on multiple cards → accumulates debt → high interest → lowers credit score

Demonstrates importance of responsible usage

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9. Conclusion

Credit cards are essential tools in modern finance. They provide convenience, liquidity, rewards, and global acceptance but also carry risks if misused. Understanding credit limits, interest, repayment schedules, and benefits helps maximize advantages while avoiding debt traps. Proper usage builds credit history, financial discipline, and ensures safer transactions.