What is a Credit Card?
Credit cards are easily the most versatile money tool that offers many benefits. They provide convenience, rewards and enable you to start having a strong credit history. But if misused they can be a source of debt and financial stress, too. To start with, knowing the fundamentals of credit cards is an absolute must to stay clear of hasty decisions and pitfalls. Throughout our discussion, we will tell you everything you need to know about credit cards such as their operations, advantages, and how to responsibly use them, among other things.
A credit card is a bank or financial institution-issued card that can be used to borrow money to make goods and services purchases or get cash, up to a certain limit. Unlike debit cards, which deduct money instantly from your bank account, credit cards provide you with a credit line you will need to pay back usually with interest, if it is not paid in full by the due day.
How Do Credit Cards Work?
When you swipe a credit card to pay for something, the card issuer pays the merchant first, and you then agree to return the money back to the card issuer. This is a quick guide to credit cards
- Credit Limit: This number is the maximum which you can lend using your credit card. You’re expected to pay your account, and the limit is then set by the card issuer on the grounds of your credit score, income, and your credit history.
- Billing Cycle: Credit cards are functional with the use of a monthly billing cycle. At each cycle’s end, the bank will send you a statement with all your transactions, the total due as well as minimum payment to be made “or face a late fee.”
- Grace Period: This is the time between the end of your billing cycle and your payment due date. If you pay your balance in full during the grace period, you won’t be charged interest on your purchases.
- Interest Rates: If you carry a balance (don’t pay your bill in full), you’ll be charged interest on the remaining amount. Credit card interest rates are typically high, so it’s best to pay off your balance each month to avoid extra charges.
Benefits of Using a Credit Card
Credit cards offer several advantages that can be beneficial if used responsibly:
- Convenience: Credit cards are widely accepted and offer a convenient way to pay for purchases, both in-store and online.
- Build Credit History: Using a credit card responsibly—by paying on time and keeping balances low—can help you build a strong credit history, which is crucial for loans, mortgages, and other financial products.
- Rewards and Cashback: Many credit cards offer rewards, such as cashback, points, or miles, for every purchase. These rewards can be redeemed for discounts, travel, or even cash.
- Purchase Protection: Credit cards often provide additional protection for purchases, such as extended warranties, fraud protection, and the ability to dispute charges for defective goods
- Emergency Access to Funds: Credit cards can serve as a safety net in emergencies when you don’t have immediate access to cash.