Credit cards or credit cards are now considered an important aspect of modern life because of these facilities, protection, and account history. But they can be a great source of financial strain if not managed well. Whether you are being introduced to the concept of credit card or want to learn more about credit cards or Guide on the usage of credit cards here is a detailed information on everything that you need to know about credit card.
The first understanding that can be made about Credit Card is what is Credit Card?
A credit card can be characterised as the financial tool being a kind of bank issued note, allowing for purchasing and payment with money borrowed and accredited by the bank up to the amount previously agreed upon. Unlike a debit card which charges money directly from your bank account, a credit card makes you borrow money that you have to repay augmented by interest if you do not pay the whole amount of the statement balance.
This paper aims at explaining how credit cards work and their efficiency in handling financial flows.
A credit card works in the manner that it is the card issuer who pays the merchant when you are using your credit card, then you are supposed to pay the amount to the said card issuer. Every month, you get your monthly charges for the month and any interest that may have been incurred and the minimum amount that is expected to be paid for the month. You are at liberty to repay the full amount and if one does not repay it in full one is charged interest on the remaining balance.
Types of Credit Cards
Credit cards come in various types, each designed to meet different needs:Credit cards come in various types, each designed to meet different needs:
Standard Credit Cards: They are the stripped down credit cards with a line of credit and balance transfer capacity and little else.
Rewards Credit Cards: These types of cards give back in the form of cash, points, or travel reward for every dollar you charge. They are useful if you would like to make your daily shopping generate you some reward.
Secured Credit Cards: These are meant for the no credit or low credit score individuals. Security charges are required and the amount you pay here is your credit line. Here is your opportunity to build or rebuild a good credit.
Balance Transfer Cards: These are cards that enable you to transfer a balance from another credit card and save money by paying off high interest amounts known at a lower amount and sometimes with no interest for a certain period, usually in the first year.
Charge Cards: Unlike the conventional credit cards, you are expected to pay the balance in full whenever the statement is rendered with the charge cards. They do not have a set spending limit , but they do have limits depending on the payment history of the card holder.
Student Credit Cards: Specifically targeting college students, credit cards that most of them have are likely to come with relatively low credit limits and the likely reward or privilege accompanying perks suitable for the young person.
Understanding Credit Card Terms
Before getting a credit card, it’s important to understand the key terms:However, to decide on getting a credit card, one must familiarise themselves with the following terms:
Annual Percentage Rate (APR): This is the cost of funds that one is able to incur for example if you are the kind that pays your balance forward to the next month. The APR must be as low as possible, especially if some amount of money is to be left on the credit card.
Credit Limit: The maximum credit limit which has been pre-approved or authorised by the issuer to the holder. Keeping your credit utilisation rate below is actually good for your credit score.
Minimum Payment: The minimum amount of money that one can deposit in his/her account so that the account does not go to zero balances. Such repayment keeps the interest rates high hence it is advisable to avoid minimum payments.
Grace Period: The period of time between invoice date or the last date of the billing cycle, to payment due date. Bear in mind that if you settle your balance during this period, the company will not charge you any interest on your purchases.
Fees: Credit cards levy other charges inclusive of the annual fees, the charges incurred in case of late payments, the charges levied on any transactions made over the internet from another country and any other charges that may be charged in case of transfer of balance. Knowing these can assist you in having a closer look on what can be deemed unnecessary expenses.
The Advantages of Credit cards
Credit cards offer several advantages:Credit cards offer several advantages:
Convenience: It is highly adopted, if not fully, hence can be used conveniently in transactions including eCommerce.
Security: Credit cards provide certain forms of protection against fraud and most credit cards have provisions for zero liability for fraudulent transactions.
Credit Building: Credit cards should be used responsibly in that they contribute to the formation of credit score that is essential in loan, mortgage, and rental agreements.
Rewards and Perks: Most of the cards give benefits in form of cash back, or travel points in addition to privileges including warranty on the purchased goods as well as affordable purchase insurance, and travel insurance.
This paper provides analysis of credit cards with focus on the risks involved in the use of credit cards
While credit cards have many benefits, they also come with risks:While credit cards have many benefits, they also come with risks:
Debt Accumulation: One can easily end up in debt and this becomes even easier if one is simply paying the minimum amount indicated on the credit card. When avenues of borrowing are left open, the high interest can quickly cause a large amount of debt.
Impact on Credit Score: Delays in payments or high balance affect credit score hence limiting access to loans and credit in the future.
Fees and Interest: If one fails to clear one’s balance, one is likely to be charged very high interest rates and other charges making the total cost to the purchase to be very expensive.
Pitfalls of credit card usage and ways to avoid them
To make the most of your credit card while avoiding pitfalls, follow these tips:To make the most of your credit card while avoiding pitfalls, follow these tips:
Pay Your Balance in Full: If possible, use your card and then settle it without any balance so that your card does not attract the extra charges.
Make Payments on Time: Paying Bills on time is important, set reminders or make automatic payments to help pay the bill on time.
Keep Your Balance Low: So, it is recommended that the balance should not exceed 30% of the total credit limit so as to be in the good books of credit card agencies.
Monitor Your Account: Usually ensure that you have scrutinised your statements in order to notice any charges or errors that were not made by you. Today, most of the issuers provide tracking and setting of spending and financial plans in the form of tools.
Understand Your Card’s Terms: It is as important for you to understand the fees that are associated with the card, the APR, and the rewards program for the card.
Conclusion
Credit cards can be effective means to use, and they can also help to build credit score and earn rewards but only if the card’s usage is done wisely. If you know how credit cards operate along with avoiding the common mistakes, then you can make the most out of credit cards. Whether you are a small ‘newbie’ or wishing to get the most out of your existing card the guide gives you the basic knowledge to make the decisions and use those plastic wonders to your benefit.