Credit Card Basics

Credit Card Basics

What is a Credit Card?

A credit card is a plastic or metal card that allows you to access a line of credit offered by the bank that issued the card. Every time you pay for something with a credit card, you’re borrowing money from the card issuer bank to cover the purchase. Most importantly have to pay that money back, either in full at the end of the month or over time.

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How do a credit card differ from others?

A debit card is linked to your checking account; debit card purchases automatically pull money out of your account. You’re using your own money to pay for things rather than borrowing it.

How do Credit Card works?

If you’re approved for a credit card, the bank authorizes a credit limit — the maximum amount you can borrow — to be used at your discretion. Your credit limit will depend on such factors as your income, your other debts and how much available credit you have

Visa, MasterCard, Discover and American Express are the credit card payment networks. They process credit card transactions. They make sure that the money for the purchase gets to the merchant and that the correct card holder gets billed.

When your bill comes, you have the option of paying a certain minimum amount, paying the whole balance in full, or paying some amount in between. Paying just the minimum every month is ultimately the most expensive option, since it will cost you the most in interest.

Paying in full is the best option; when you pay in full each month, you get a grace period that allows you to avoid paying any interest on purchases at all.

Grace Period — Most credit cards have a grace period, which the amount of time you have to pay your balance in full without paying a finance charge. The grace period usually starts on first day of the billing cycle and ends after a certain numbers of days after, depending on the credit card issuer.

Your credit card issuer reports your payments to the credit bureaus, the companies that prepare credit reports. Your payment history counts for 35% of your credit score — a three-digit number that indicates how risky it would be to lend you money. You must pay at least the minimum by the due date every month to avoid late fees and potential damage to your credit score.

Types of credit cards

REWARDS

Rewards credit cards give you something back for each purchase you make. Generally, these cards require good credit. They come in different types:

  • Cash back cards give you money back. Cash back credit cards are one of the most popular types of rewards cards available because they’re fairly easy to use and understand. You can usually get that money as a check or a deposit into a bank account, or you can use it to reduce your balance.
  • Airline credit cards and hotel credit cards give you miles or points that you can redeem for free flights or stays with the card’s partner airline or hotel chain. How you redeem your rewards on these cards might be subject to restrictions, such as dates when you can’t travel.
  • General travel cards give you points that you can use to pay for any travel expense. They’re more flexible than branded airline or hotel cards.
  • Store credit cards reward you for loyalty by giving you discounts or other benefits for shopping at the store that provided the card.

Rewards cards are ideal for cardholders who pay their bill in full every month. When you carry a balance, interest charges nip away at the value of rewards.

LOW INTEREST

Low-interest cards don’t give you rewards; they provide value with a lower interest rate, making it less expensive to carry a balance. Many times, these cards will come with a 0% introductory APR (Annual Percentage Rate) period, giving you time to pay off a large purchase without interest. You usually need good credit to qualify.

BALANCE TRANSFER

A balance transfer credit card lets you move your debt from another issuer to take advantage of a lower interest rate. Generally, these cards require good or excellent credit.

STUDENT CARDS

Being a college student doesn’t automatically qualify someone for a student credit card. The Credit Card Act of 2009 prohibits issuers from giving cards to people under 21 unless they have proof of income or a co-signer, someone willing to put their credit on the line to help the applicant build theirs.

Reasons to get a credit card

Debit cards are appealing because they don’t involve borrowing money and won’t rack up debt — but they also don’t help you establish a credit history. Building credit is one of the key benefits of using a credit card. Others include:

Sign-up bonuses. The bonus could help you start an emergency fund (in the case of a cash back card) or take a trip.

Ongoing rewards: Rewards give you back some of the money you spend.

Building credit: Establishing a good payment history can help you borrow money in the future at lower rates.

A 0% introductory APR period: This lets you avoid interest on purchases or balance transfers during a promotional period.

Flexibility: Though it’s best to always pay your balance in full each month, a credit card allows you to pay for things over time, which helps when you have a major purchase to make or a financial emergency.

Costs of a credit card

Credit cards come with costs, but you can avoid most of them with responsible use. They include:

Interest payments: Credit cards can have different interest rates, or APRs, for purchases, cash advances and balance transfers. When you pay in full every month, your purchases don’t accrue interest.

Annual fees: Some cards charge annual fees. An annual fee can be worth paying if the card gives you rewards and perks that make up for the cost, but in most cases, you shouldn’t pay a fee just for the privilege of having the card in your wallet.

Late payment fees: The cost varies by issuer.

Balance transfer fees

Foreign transaction fees

Tips for effective credit card use

The benefits of using a credit card responsibly outweigh the costs. Here are some good practices to adopt:

  • Pay your bill on time and in full every month
  • Keep your balance below 30% of your available credit
  • Wait at least six months between credit card applications
  • Review your account online weekly to track spending and avoid fraud
  • Keep no-annual-fee credit cards open and active to avoid hurting your credit score

Using a credit card responsibly is an easy and efficient way to establish healthy credit. You’ll be thankful that you did so when you’re able to borrow easily in the future.

Using a credit card responsibly is an easy and efficient way to establish healthy credit. You’ll be thankful that you did so when you’re able to borrow easily in the future.

In addition credit card gives you access to the entire world of shopping by providing a reliable form of digital payment you can use at many online stores.

Therefore, If you’re thinking credit card is suit for you, Choose one wisely.

Have a good day!

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