A credit card is a convenient and innovative way of paying for things with borrowed money. The most common uses of a credit card would involve using it at a petrol pump or a shopping mall. Financial institutions that issue credit cards initially pay the petrol pump or shopping mall on your behalf, and you would need to pay them later. In a nutshell, you borrow money while using a credit card.
People use credit cards to buy things when they do not have the money to pay upfront or use it just for convenience. There could be any reason for using a credit card; it is essential to note that the amount spent using a credit card must be repaid to the bank.
There could be other reasons to use a credit card, such as cashback or reward points. Whatever the reasons are, using a credit card means borrowing money.
A credit card could be a handy way to pay for things, build a good credit history and earn reward points, but if you don’t handle it correctly, it could be a gateway to debt. You need to understand how a credit card works to get the most out of a credit card, i.e., What fees and interest are involved, and what is the best way to manage payments?
When using a credit card, you’re effectively borrowing money to make a purchase or transaction. The official term for a credit card is a ‘revolving line of credit.’ If a credit card is used wisely, it could be one of the most effective financial tools available to consumers of all ages.
Type of Credit
A credit card’s type of credit is known as revolving open-end credit. This credit could be used up to a pre-defined limit by using a card once or multiple times.
A credit provider, such as a bank, agrees to provide a certain amount of credit to the cardholder. The cardholder can then use this credit as per the requirement. For example, the cardholder can purchase without using cash by presenting the card at a place of business that accepts the credit card. Cardholders can continue to use the card until reaching the credit limit.
Each month, the cardholder receives a bill listing all credit card purchases. Cardholders would need to pay off all or a minimum amount of the borrowed money.
Finance Charges on Credit Card
A finance charge represents the interest that a credit card holder needs to pay for using credit. Purchases made after the statement issuing date are not considered when determining the finance charge as they appear on the following month’s statement. A finance charge applies only to balances not paid in full before their due date in the current billing period.
A finance charge could be at a fixed rate, a variable rate, or a tiered rate.
- A fixed rate does not change even if market interest rates change.
- A variable-rate adjusts to a specified market interest rate, such as a one-year repo or bank base rate. For example, the credit card interest rate could equal the one-year bank base rate of +12 %. The financial institution must disclose how that variable rate is determined on the credit card.
- Financial institutions may offer a tiered rate, such as a relatively low rate for balances below a specified ratio and a higher rate above that. They can also revise the interest rate as a penalty if you make late payments.
Annual Fee
Many credit card companies charge an annual fee for providing credit card services. However, the fee is sometimes waived off for individuals who promptly pay their credit card bills.
Grace Period
Banks allow a grace period in which a customer is not charged any interest on purchases made on a credit card. The grace period could of 20 days from the time the credit card statement is issued, and the bill is due for payment. This could also be seen as a credit period that a credit card issuer provides on a purchase until the payment is due.
Tips for Using Credit Card
Some helpful tips while using a credit card are:
- First, shop around for the credit card that best fits your needs.
- Make sure to understand a credit card’s terms and conditions before accepting it.
- Finally, hold the receipts to reconcile charges when the bill arrives.
- The cards and account numbers should be protected to prevent unauthorized use. Draw a line through blank spaces on charge slips so the amount can’t be changed. Tear up carbons.
- Keep a record – in a safe place separate from the cards – of account numbers, expiration dates, and the phone numbers of each issuer to report a loss quickly.
- Carry only the cards that are supposed to be used.
Conclusion
A credit card can be a valuable tool if used correctly. It can help you build your credit history and improve your financial standing. Used responsibly, a credit card can give you the flexibility to make purchases when you may not have the cash on hand. It can also be helpful in an emergency.
However, it’s important to remember that a credit card is not free money. You will need to repay any balance you incur plus interest and fees. A credit card can lead to debt and financial problems if not appropriately managed.
