Summary of this article
Understanding key credit card terms helps avoid high interest and growing debt.
Paying bills fully and on time safeguards your overall credit score.
Smart use of rewards and grace periods maximises savings and convenience.
For many first-time users, credit cards let them spend now and pay later. But with little understanding of how the system works through billing cycles, interest rates, or rules of repayment, a small swipe can lead to large debt over time. Here are eight common terms related to credit cards and why these are worth understanding.
1. Annual Percentage Rate (APR)
Annual Percentage Rate (APR) reflects the annual cost of borrowing using a credit card, including interest and fees. This is the rate at which the outstanding amount will incur interest if the full amount of the bill is not repaid by the due date.
For instance, if the outstanding balance of Rs 10,000 on a card incurs an APR of 42 per cent, the interest piles up rather fast. Paying the full bill each month is the best way to avoid this cost. Average credit card APRs in India usually fall between 36 per cent and 42 per cent.
2. Minimum Amount Due
This is the least amount that needs to be paid before the due date in order to keep the account active. Paying only this amount prevents penalties, but keeps the remaining amount rolling forward with interest. If the total bill is Rs 5,000 and the minimum due is Rs 500, the leftover Rs 4,500 will attract high interest until paid off.
The average minimum amount due in credit cards typically lie between 2 per cent and 10 per cent of the total outstanding balance.
3. Credit Utilisation Ratio
This is the ratio of utilisation of the available limit on the card and is calculated as the ratio of the outstanding balance to the total limit. For instance, if the limit is Rs 1 lakh and the balance is Rs 30,000, the utilisation ratio is 30 per cent. It’s ideal to keep this below 30 per cent for a good credit score.
4. Grace Period
The grace period refers to the period between the end of a billing cycle and the due date. No interest is charged during this time if full payment is made. The majority of credit cards have a grace period ranging from 20-55 days. Missing this means interest begins accruing from the date of purchase.
5. Billing Cycle
The billing cycle is the time between two statement dates, usually 28-31 days apart. For instance, if the cycle goes from the 5th of a month to the 4th of the next, it means that all purchases made in that period will appear on the succeeding bill. By knowing the cycle, one can plan purchases and payments accordingly in a more efficient way.
6. Cash Advance Fee
Withdrawing cash using a credit card seems very convenient, but is costly. There is a fee of 2-3.5 per cent of the amount withdrawn as cash advance fee, and interest is charged immediately with no grace period. So, withdrawing Rs 5,000 could cost Rs 175 as fees plus daily interest until repayment.
7. Late Payment Fee
There is a late charge of usually Rs 100-1,000 levied if a payment is missed, depending on the outstanding amount. Other than that, it can also have implications on the credit score. Setting reminders or enabling auto-pay will help avoid such penalties.
8. Reward Points and Cashbacks
Most cards provide either reward points or cashback on transactions. Reward points can be redeemed for store purchases, online shopping, flight tickets, or vouchers, while cashback is a small return on spending. For instance, in case of 1 per cent cashback on Rs 10,000, you earn Rs 100 back.
When used with caution, credit cards can be valuable financial tools. While they offer convenience, short-term credit, and rewards, understanding the terms related to your credit card is how to avoid making costly mistakes.
