The Ultimate Guide to Credit Cards: Benefits, Risks, and Choosing the Right One

Introduction

Hello, friends! I know you are expecting a video on the Pegasus Scandal, But I'd like to wait for a few more days. It's very recent news with new developments are surfacing every day. So let's wait for a few days. And then I'd make a video on that topic. In today's video, I'd like to continue with the Financial Education series. The topic of today's video is, Credit Cards!

What are Credit Cards?

• What are credit cards?
• How do they work?
• How do credit card companies make money?
• Should you be using a credit card?
• What are the pros and cons?

Understanding Credit Cards with an Example

Come, let's find out. Let's use an example to understand. Suppose you're a school student and suddenly there's a pandemic. All your classes are now online. But to attend these online classes, you'd need a smartphone, but you don't have one. You need to buy a smartphone urgently. But there's insufficient money in your bank account for buying it. So you ask your parents to transfer some money to your bank account. But it'll take 2-3 days to transfer the money. But you need to buy the smartphone before your class the next day. What other options are there?

How Credit Cards Work

In such situations, you can use credit cards to make the purchase immediately. And pay for it later. So essentially, a credit card is a card that helps you in purchasing things instantly. But you can pay for them later. At the end of the month. Generally, if there's enough money in your bank account, you withdraw cash and use it to make payments. The second option is to use a debit card. It is directly linked to your bank account. When you make a payment through your debit card, then the money is deducted directly from your bank account and transferred to the other party. But in a credit card, the bank makes the payment on your behalf. To whomever you're trying to pay. And then at the end of the month, you repay all the expenses of that month to the bank. You can take more than a month in repaying the bank's money. Then the bank will charge high interest. Similar to a loan. So you can think of the credit card as a type of a 'mini loan.'

Credit Card Issuance and Payment Processing

Normally when you take a loan, you can get it in cash if you want to. But here, instead of a loan, the bank is giving you a plastic card. With your name and a unique number on it. So that the card can be uniquely identified. As well as the expiry date. How is the payment being processed? There are some payment processing companies. Like Visa and MasterCard. These two are the most popular companies. They basically provide the back-end infrastructure to facilitate credit card transactions. The bank issuing you the credit cards, are distinct from Visa and MasterCard. These two are only involved in the payment processing. And there is a magnetic strip on the other side of the credit card. As well as the CVV number. It is very important to keep it safe and secret. Otherwise, you may be a victim of fraud.

Credit Limit and Credit Score

Now, friends, every credit card has a credit limit. The amount of money that you can spend with the credit card. Without first paying the bank. If the limit is set at 30,000 Then you can't spend more than 30,000 using that credit card. The credit limit varies from bank to bank. And the type of card you've bought. And the bank checks your salary. It checks your credit score. And decides on your credit limit based on these. If the bank is assured that your salary is adequate that you can afford to pay back the bank then the bank will trust you more. And you get a higher credit limit.

Credit Score Explained

Now, Credit Score is also an interesting concept. If you don't make the credit card payments and loan repayments on time, then the bank will think that it will be quite risky to give you money. It'll be unsure about when you'll repay the advances, if at all. Because the bank takes a risk while giving you a credit card or a loan, to judge this risk, the banking sector has created its grading system. It grades you. The score ranges from 300 to 900. And it is known as your Credit Score. If your credit score is between 750 and 900, then it is an excellent credit score. It means that the bank can trust you and the risk is very low. But if your score is around 300-400, then the bank can't trust you at all. So your credit score is calculated based on your previous track record. And on that basis, the bank judges if your credit limit should be high or low. In fact, whether or not to issue a credit card to you at all.

Benefits of Using a Credit Card

How will you benefit from using a credit card? I talked about one advantage at the beginning of this video. That if you want to buy something immediately, but you want to pay for it later at the end of the month, you can. It helps to meet immediate expenses. The second major advantage is that using a credit card is less risky than using a debit card. If you're a victim of a fraud then in the case of a debit card, the money will be directly deducted from your bank account. But in the case of a credit card, your bank or the credit card issuer will pay on your behalf. And if there's a fraud, they can investigate it. If there's actually a fraud, then they'll get your money back. In India, if there's any fraud with your credit card then the customer's, i.e. your, liability is zero. If you report the fraud within 3 days. So the risk of making payments is borne by the bank. The third major advantage is the rewards that you get for using a credit card. The reward systems vary depending on the bank and the type of credit card. In some, you may get cashback in others, you may get heavy discounts you may even get insurance in some. Like insurance to be paid if you meet with an accident. You can also get travel insurance for free with your credit card. The benefits that you'd get for using it depends on your credit card. But nowadays, almost every credit card comes with some sort of a reward point system. You can collect the points and can then exchange those points to buy something expensive.

Choosing the Right Credit Card

Which credit card is right for you? To decide, you need to remember three main things. First is the bank that will issue your credit card. Any reward point system, the fees charged by the bank and any hidden fees. Let's meet in the next video. Thank you very much!!