Credit Cards

Understanding Credit Cards, How They Work, And Their Importance

A credit card is a financial tool designed to let you borrow money from a bank or other lender, but with certain strings attached. These are usually fee-based and carry interest rates that fluctuate depending on the credit card issuer. Most credit card issuers have stringent guidelines as to when, how, and where you can use a credit card. Failure to comply with these guidelines usually results in interest and penalties that may outweigh any savings.

How Credit Cards Work
The bank will give you a credit limit when you use a credit card. That is how much money you can borrow for spending on this card. You can spend the total amount on your card within a few days, but additional credit charges are added if you spend more than your credit limit. These are known as interest charges or finance charges. These charges essentially interest the bank charges you for taking more time to pay back your debt. If you fail to make at least the minimum interest payment, additional fees are added, adding even more costs to your credit card.

When you borrow money from a bank, the interest rate you are charged directly reflects your credit score. The bank looks at factors like income level, total debt load, and payment history to determine what interest rate to charge. Each bank weighs different factors when calculating your credit score. That’s why it is essential to check your credit report for accuracy before applying for a card.

Types of Credit Cards
There are several different types of credit cards. Depending on the issuer, you can use a credit card that accepts that type of card anywhere. For instance, you can use a Visa credit card from one bank at any merchant that accepts Visa. Some are general use, and some are more specific and geared towards a particular type of shopper or industry.

  • General Purpose Credit Cards

General-purpose credit cards are the most common type. These cards are used to pay for general living expenses and often include services such as cashback, reward points, and other benefits. The interest rates on these cards vary depending on the issuer but can be lower than different types of credit cards.

  • Prepaid Cards

Prepaid cards are a variation on a general-purpose card. They often allow the use of a Visa or Mastercard number, but instead of spending a credit line, money is paid directly from the card’s balance. The money does not accrue interest and can only be spent on the things designed for the card. There are prepaid cards for cell phone bills, school fees, and other expenses. These cards are not intended to be used as a credit card or incur debt.

  • Credit Card Rewards Programs

A rewards program is a way to earn money using your credit card. Each time you use your card, you are awarded points that are exchanged for cash or shares of stock. Credit card companies usually have a rewards program in place, but it is up to the consumer as to which cards are used for purchases that they will make.

Why People Take Credit Cards
Credit cards offer many benefits to their owners. They include:

1. Convenience
Most credit cards are designed to make life a whole lot easier. You can use your card in stores and restaurants without carrying around money or standing in long lines.

2. Insurance
There is the option to use credit cards for purchases that you wouldn’t usually be able to afford. For example, a camping trip may end up costing thousands of dollars. You don’t want to risk not being able to pay for your occupancy if you run out of money. You can use your credit card to purchase expensive items and pay them off monthly. Insurance against unexpected costs is often available for those that use their cards for the right purchases.

3. Protection
Credit card protection is also available for users. You can use this to ensure you don’t become a victim of fraud or theft yourself. In addition, some governments offer significant protection against foreign exchange and purchase copies that may have serious financial consequences for you.

4. Reward Points
Credit cards offer reward points to their users. These are usually dolled out regularly and can be redeemed for airline miles, hotel points, and more.

5. Grace Period
Finally, credit cards give you a certain grace period when paying them off. If you come up with just a few dollars short of your bill, or even if your payment is two days late, financial institutions may allow you to continue making payments for a particular time.

6. They are accepted everywhere
Credit cards are accepted everywhere you go. In addition, many third-party vendors will allow you to pay for their services with credit cards.

7. Bonuses
Many banks offer bonuses to new customers. These bonuses may include higher credit limits and cash incentives to apply for the card. It can be a great way to get a few hundred dollars to sign up for a new card.

When not to use a Credit Card
Although the benefits of using a credit card are many, there are some instances in which it may not be wise to use a credit card. Mainly, this comes down to how close you are to being able to afford your monthly payments. Paying your credit card balance in full monthly can help you avoid the interest that comes with credit cards. Here are some instances in which it is not recommended to use a credit card:

1. If you don’t have the money
When you use a credit card to purchase, the amount is usually due on your next billing cycle. If you cannot pay for this purchase, then it is best to stick with cash. Credit cards may give you a grace period, but this period is usually not long enough to avoid paying interest.

2. If you are not entirely sure you will pay it back later
If you have a large balance on your credit card and aren’t convinced you can make the payments, don’t use it. Be responsible and pay off the entire balance each month. You’ll have better credit in the future and won’t risk additional costs from interest and late fees.

3. If you can only get a credit card with a low credit limit
If you have a good credit score but don’t have a lot of available credit, don’t use a credit card. You’ll wind up paying more in interest than if you had used cash. It is especially true if you can only get a credit card with a low limit.

Credit cards are a helpful tool if you use them responsibly. You can use them to get money quickly and easily, but only if you follow some basic rules. Don’t get over your head by spending more than you can afford. Pay your credit card bills in full each month, and don’t spend money you don’t have. A good credit score can also help you get better credit cards with lower interest rates.