Credit card
Also written Credit cards
A card that lets the holder pay using a lender's credit line rather than their own account balance, with interest charged if the outstanding amount is not paid on time.
In plain language
A credit card lets you buy something now and pay for it later, using the bank's money rather than your own.
That is the whole difference from a debit card. A debit card only ever spends money you already have in your account. A credit card spends money the lending bank has agreed to lend you, up to a limit, and you settle the bill afterward — with interest if you do not pay it off on time.
Because a credit card is a form of lending, the bank checks your credit history before issuing one, in a way it does not for a debit card. And because it is a debt instrument, the booklet treats careless credit card use as one of the fastest routes into a debt trap.
How it works
The booklet's comparison table sets out four differences from a debit card:
| Credit Card | Debit Card | |
|---|---|---|
| Source of funds | Lending bank's credit facility | Linked to your own savings/current account |
| Interest | Charged if outstanding is not paid on time | Not applicable |
| Credit history | Relevant for issuing the card | Not relevant |
| Relationship with issuer | No need to have an account with the issuing bank | Having an account is a pre-requisite |
Both cards can withdraw cash from an ATM and pay at a point of sale.
Chapter 8's debt-trap tips apply directly to credit cards: use one only "to facilitate payment and not as a means to borrow money," never treat it "as free money," and prefer a debit card where possible because it "eliminates the risk of spending beyond your means."
A worked example
Ananya has a credit card with a Rs 1,00,000 limit and no dues. She spends Rs 60,000 on it during a festival sale.
If she pays the full Rs 60,000 by the due date, she pays no interest at all — this is the interest-free credit period a credit card typically offers. If she pays only the minimum amount and rolls over the rest, interest accrues on the outstanding balance from the transaction date, and the cost compounds month on month, which is exactly why the booklet's Tip 4 warns never to treat a credit card as free money.
Compare this to her sister, who spent the same Rs 60,000 using a debit card linked to her own savings account with Rs 65,000 in it. The Rs 60,000 left her account immediately — no debt was created, and no interest question ever arises, because a debit card only ever spends money she already had.
Why NISM asks about it
Chapter 4 (Savings Related Products), Section G, defines the credit card and gives the comparison table against a debit card. Chapter 8's debt-trap tips return to credit cards as a leading cause of unmanaged debt. Expect the comparison table tested directly — source of funds, interest, credit history relevance, and the account-relationship rule.
Common exam traps
- A credit card holder does not need an account with the card-issuing bank; a debit card holder does. This is the reverse of what many candidates assume.
- Credit history matters for issuing a credit card, not a debit card — a debit card is simply linked to an account you already hold.
- This booklet's product-mechanics page is a different concept from the behavioural-finance page on credit cards and impulsive spending taught elsewhere in the glossary — that page covers why a credit card can drive stress-linked overspending; this page covers how the card itself works as a lending product.
- Both cards can be used at ATMs and points of sale — cash withdrawal is not a debit-card-only feature.
Check yourself
1.Which of the following can a payment bank NOT do?
- a)Provide savings and current account facilities
- b)Issue ATM or debit cards
- c)Accept recurring or fixed deposits and give loans or advances
- d)Offer payment and remittance services
Show the answer
Answer: (c) Accept recurring or fixed deposits and give loans or advances
The chapter's payment bank entry: "Provides savings account/current account facilities. Can accept DEMAND DEPOSIT BUT NOT RECURRING/FIXED DEPOSIT. Can issue ATM/Debit Cards BUT NOT CREDIT CARDS. CANNOT GIVE LOANS/ADVANCES. Offer payment and remittance service through various channels." Learn the three prohibitions as a set: no fixed or recurring deposits, no credit cards, no loans or advances. Every exam question on payment banks is built from one of them. Set this against the small finance bank, which is almost the opposite creature — it exists to lend, taking small deposits and disbursing small loans to "small business units, micro and small enterprises, small and marginal farmers and entities in the unorganized sectors", serving "unserved and underserved sections of population." And note that a Business Correspondent is not a bank at all but "a representative of a bank who goes to customers."
2.According to the comparison in the chapter, which statement is correct?
- a)A credit card requires the holder to have an account with the issuing bank; a debit card does not
- b)A debit card requires an account with the issuing bank, while there is no compulsion to have an account with the bank issuing a credit card
- c)Credit history is relevant for issuing both cards
- d)Interest is levied on debit card transactions if not repaid on time
Show the answer
Answer: (b) A debit card requires an account with the issuing bank, while there is no compulsion to have an account with the bank issuing a credit card
The last row of the chapter's table reads: Relationship with the issuer — Credit Card: "NO COMPULSION to have account with issuing bank"; Debit Card: "HAVING AN ACCOUNT WITH THE ISSUING BANK IS A PRE-REQUISITE." This is the row that surprises people, and the reason is logical: a credit card is the lending bank's money, so the bank only needs to be satisfied about your credit history; a debit card is merely a key to money already sitting in your account there. The other rows follow the same logic — interest is levied on a credit card "if outstanding amount is not paid on time" and is "not applicable" to a debit card; credit history is relevant for a credit card and not relevant for a debit card. Both cards, however, "can be used for withdrawal of cash from ATMs as well as for digital transactions."
3.A family owns a bank balance of ₹3,20,000, fixed deposits of ₹6,50,000, gold worth ₹9,00,000, a self-occupied flat worth ₹46,00,000 and a two-wheeler worth ₹45,000. It owes ₹28,00,000 on a home loan, ₹4,00,000 on a shop loan and ₹85,000 on a credit card. What is the net worth, and what does it NOT tell the family?
- a)It is negative because the home loan is large
- b)₹32,30,000 — but it measures capacity, not spendable cash, since ₹46,00,000 of it is the home they live in
- c)₹65,15,000, which is the amount available for investment
- d)₹32,30,000, which is the amount they can withdraw at any time
Show the answer
Answer: (b) ₹32,30,000 — but it measures capacity, not spendable cash, since ₹46,00,000 of it is the home they live in
Assets total ₹65,15,000 and liabilities ₹32,85,000, so net worth is ₹32,30,000 — comfortably positive. The family's assumption that it must be negative comes from comparing the ₹28,00,000 loan against income, where it looks enormous, instead of against the asset it bought, worth ₹46,00,000. But the chapter is precise about what the figure means: "Your net worth indicates your CAPACITY to achieve your financial goals." Capacity, not cash. Realising the ₹46,00,000 flat would mean selling it and renting instead, so the genuinely mobilisable assets are the bank balance, deposits and at a pinch the gold — about ₹18,70,000. And the number says nothing about direction: for that they need savings, the flow of income minus expenditure. One item deserves attention despite its size — the ₹85,000 credit card outstanding is trivial on this statement and almost certainly the most expensive money in the house.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Debit cardA card linked to your own bank account, used at ATMs and to pay at shops. It spends money you already have, so there is no interest and no credit history needed to get one.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
- DebtMoney borrowed to cover a shortfall, when your expenses are more than the funds you actually have in hand — the booklet's own one-line definition.
- Customer liability for unauthorised transactionsRBI's rule that a bank customer bears no loss from an unauthorised transaction caused by fraud, bank negligence or a system failure elsewhere — provided it is reported within three days of the alert.
- BorrowingTaking money and paying it back over a period, usually through Equated Monthly Instalments, used to meet a financial goal when savings alone are not enough.
- Revolving creditCredit card borrowing that arises when the bill is not paid in full by the due date and the balance is carried into following cycles — at 3% a month, a compounded 42.6% a year.