About Credit Cards
When you make a purchase using your credit card, you are essentially taking out a short-term loan. The interest that is applicable to this loan will depend on when you pay it back. If you are able to make payment before the due date, there will be no interest charged. Credit cards also have a small grace period before the payment is due in any billing cycle, which can be around 30-45 days. Paying before the end of the grace period will help you avoid any interest while paying less than the total balance will accrue interest on the average daily balance.
Why get a credit card?
With a number of benefits supporting credit cards, the most important one is that it can help you build your credit score. Good credit, in turn, will help you obtain loans much easily in the future and also negotiate for a lower rate of interest. It also helps in getting lower insurance premiums. Apart from this, there are a number of cards with rewards programs that can offer cardholders with a number of extra benefits like reward points, shopping benefits, etc.
Grace Period/Free-Credit Period
Say you have a billing cycle of 5th January through 4th February, and the due date is 1st March, then any purchases that are made within the period will remain interest-free until the due date. This is the grace period that is offered for credit cards in India, after which the balance will be subject to interest. Any cash advances that are taken on your card do not enjoy the benefit of a grace period.
If the cardholder does not pay the total amount due before the due date, the entire outstanding balance will attract the applicable rate of interest. Not just the balance, any new spending on the card will also have these interest rates applicable until the entire balance has been paid off. However, in the case of a cash advance, unless the cardholder pays off the entire bill balance each month, there will be no grace period for them. Low-interest cards are available, and should always be looked into whenever you compare cards. When the card holder does not pay the bills on time, then interest is applied to it which leads to accumulation of debt. Being late on paying the bills is referred to as default. Late penalty fee can also be applied to the accumulated debt.
Understanding Credit Card Numbers
On the front side of your card, there are 16 numbers which are unique to your card. American Express and Diner Club cards have 15 digit numbers. These are not just random numbers; you will be surprised to know that every single number carries a specific meaning. Card numbers are assigned by the International Standards Organization (ISO). Let us break down these numbers and understand what they mean.
The first six digits of the card are a combination of Major Industry Identifier (MII) and the Issuer Identifier Number (IIN). In fact, it is only the first number that defines the major industry, that is, the banking and financial industry. Some other popular MII are-
- 3 for Travel and Entertainment
- 4 for Banking and Financial (VISA)
- 5 for Banking and Financial (Master Card)
- 6 for Merchandising and Banking
The first number (MII) along with the next five numbers represents the exact identifier. These six digits are together known as the Bank Identification Number (BIN).
Next is the account number which identifies the user. Different banks and card issuers may have different lengths and number sequences when it comes to the account number of the user. The next part of your card number is the checksum, also known as the ‘Luhn Algorithm’. This algorithm was awarded as a US patent to IBM Scientist Hans Peter Luhn. It is used to confirm the initial digits of a credit card and prevents casual attempts to make up new card numbers. This is how you can implement this formula-
Step 1- Double every odd number on the card starting from the right. Suppose your card number is 4321 4456 9212 7754. 5x2=10, 7x2=14, 1x2=2, 9x2=18, 5x2=10, 4x2=8, 2x2=4, 4x2=8(10, 14, 2, 18, 10, 8, 4, 8) - This is the sequence you get.
Step 2- Now add these digits to the un-doubled numbers. Add the double-digit numbers to form a single one. For example, if it’s 14, the single-digit will be 1+4=5. So now the sequence is- (1, 5, 2, 9, 1, 8, 4, 8).(1+5+2+9+1+8+4+8) + (3+1+4+6+2+2+7+4) = 67
Step 3- If the number you have got from step 2 is not divisible by 10, the credit card number is fake.
Since the above number is 67 and it is not divisible by 10, this credit card number that we started with in step 1 is a fake number. Apart from these, a CVV and issue and expiration dates are assigned to your card. CVV are security codes for different card providers.
Credit Card Bill Payment
When you get a credit card, a billing date will be mentioned on the document provided with the card. This is the date on which your bill will be generated for the given billing cycle which you are required to pay on or before the due date. The outstanding amount on your card will be shown as- Minimum amount due and total amount due. The total amount due is what you are required to pay. However, if you cannot afford to pay the total outstanding amount, the bank gives you the option to pay the ‘minimum amount due’. When you pay the minimum due amount, no late payment fee will be levied. However, the bank will charge interest on the remaining balance for as long as it stays in your account. So it is advised to always pay the total amount due on your card so you can save on the late payment fee as well as interest charges.
Making late payment on credit cards can also dip your credit score. Your credit report has a section for ‘Days Past Due’ which records the number of days after the due date during which the amount remained outstanding in your credit account. This leads to a low credit score which in turn makes it difficult for you to get loans in future. Some important terms related to your credit card are-
Total Amount Due- This is the total amount that you have to pay towards your card.
Minimum Amount Due- This is minimum amount you must pay in order to avoid any late payment charges.
Billing Date- This is the date on which your card statement is generated.
Billing Cycle- This is the period between two billing dates.
Due Date- This is the date on or before which you should clear your dues.
Reward Point Balance- This is total number of reward points in your account.