How Credit Card Works: Credit cards have become the most accessible source of funds for the wide economy. Depending on the needs and requirements of the customers, banks tend to offer feature-based credit cards to different people. Thus, the level of satisfaction tends to play an important role in the number of people buying such personal financial tools.
The card issuer, usually a bank, creates a revolving account and grants a line of credit to the customer so that he can keep track of how much money is borrowed and how much must be paid.
Understanding Your Credit Card Work
Credit card works are different from the charge card, wherein the balance must be paid at the end of each month, but the credit cards give a facility of accumulation of debt and pay it at a specific time. A credit card is different from a cash card as well. Cash cards can be used as currency by the cardholder, but credit cards are a source of currency, not a currency by themselves.
Various Terminologies:
- Credit limit: The credit limit is decided by the issuer. The cardholder cannot spend more than the credit limit set by the bank. It depends on the income of the individual. If the income is high, the credit limit will also be high.
- Balance: If the credit limit is 5000 USD, then from the start of the billing cycle, the balance will be 5000 USD.
- Available credit: Continuing with the above example, if the cardholder spent 2500 USD using the credit card, then the available balance will be (5000-2500) USD i.e., 2500 USD.
- Billing cycle: It’s a 45 day period that begins from the start date till the end of the due date. All the transactions between that period are counted in the credit card bill.Read Also: Change Your Credit Card Due Date
The Cost Of Charging A Credit Card Balance:-
The issuer or the issuing bank gives time to pay back the amount borrowed by the individual using a credit card. That period is referred to as the grace period wherein zero interest (finance charge) is charged if the amount is paid in full. The grace period varies from 20 to 25 days.
Reviewing The Credit Card Activity Or The Transactions:
The issuing bank will send a mini statement wherein important details regarding the credit card activity will be mentioned, like the outstanding balance, reward points, minimum payment, due date.
Paying the minimum payment can take more time to pay off the debt. The cardholder can review all the transactions to know whether there are discrepancies or not.
Let’s first understand the pros and cons of the credit card:
Pros of Credit Card:
- Easy to carry and pay through the credit card: quite mobile, easier to carry than carrying cash in hand.
- Safer than carrying cash in the wallet.
- The payment can be delayed i.e., consumption can be instant, and the burden is transferred later in the month.
- Freebies: reward points, discounts, waivers are given with several credit cards.
Cons of Credit Card:
- Interest rates are quite high: The delayed payments are charged with high-interest charges, which can vary from 36% to 48% per annum.
- Other Charges: Processing charges, renewal fees every year, annual fee.
Charges And Fees:
If the customers are not able to pay the bill amount before or at the due date, the banks or the financial institutions charge huge interest rates. Customers should be aware of this, as well as the last date of the introductory period. It is said that transferring is advisable, but it is chargeable at the rate of 3%. Thus, the bank which has issued the credit card will take 3% of the Balance transferred as their fees or penalty by the cardholder.
If the payments are delayed, then it affects the credit rating of the individual. This will create a huge problem when the individual is looking for loans in the future.
Cash Withdrawals:
ATM machines work differently for credit cards and debit cards. No charges are levied on the cash withdrawal from the debit card, but when withdrawn using a credit card, certain charges are levied by the banks.
How to Read The Credit Card Statement
There important terminologies in the credit card statement are:
People making an online credit card transaction illustration
- Total credit limit: The total limit sanctioned by the issuer or the issuing bank. The cardholder cannot spend more than the total credit limit using the credit card.
- Available credit limit: After using a part of the total credit limit, whatever is left is termed as the available credit limit. It is the amount that the cardholder can still utilize.
- Transactions: The number of retail purchases wherein you have utilized the credit card to pay
- Dates: The billing cycle of the cardholder
- Dues: The outstanding balance the cardholder has to pay
- Account summary: It gives the information about the past dues as well
- Rewards point summary
- Special offers for the month
- Important statutory information
Reward Point Balance
As mentioned earlier, the credit card statement will also show the number of reward points accumulated till now. The cardholder can get benefits by using the reward points. If the reward points are not utilized, then they get carried forward to the next billing cycle, while some banks won’t allow carrying forward the reward points; thus, they lapse in that billing cycle itself.
Are Credit Cards a Good Idea?
Credit Cards can be a great addition to your wallet if used correctly. They offer great benefits:
- It helps you build or improve your credit score.
- It helps you to take interest-free “loans.”
- Valuable rewards and cashback
- Various shopping and travel benefits.
- Zero liability when you lose your credit card, or it gets stolen.
However, before applying for a credit card, you must always consider whether you’ll be able to use it responsibly or not.
Will you only make payments that you can pay off? Or will you make payments that you can’t afford at the end of your due date? Can you pay your balance in full every month?
If all these questions sound difficult for you, then credit cards may not be the right choice for you because if you don’t use them wisely, you will be trapped in credit card debts.
However, if you can use a credit card wisely, then it will be a great financial tool for you.
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Very helpful content on this topic, great job!