Credit cards can be a quick and easy way to borrow money to make a purchase. If you don’t have any cash on hand, your credit card can be a convenient solution. Or, if you are in a cash flow problem and can’t wait for pay-day, a credit card can come in handy for this too.
However, credit cards aren’t for everyone. If you have problems paying your bills on time, or making purchases you can’t afford, then getting a credit card may not be a good idea for you. A credit card is a good way to build your credit score, but it can also create consumer debt problems if they aren’t used properly.
What is a Credit Card?
A credit card is a plastic card issued by a bank or other financial institution as a payment method. The cardholder is given the ability to pay for purchases from a line of credit, with the promise that it will be repaid.
How Do Credit Cards Work?
Whether you make your purchase in-person or online, your card number is presented to the merchant and verified with your bank to validate your card details, the transaction amount and type. If approved, the transaction is stored as a ‘batch’ by the merchant’. These batches are usually submitted once at the end of the business day.
After this, the merchant’s bank sends these batches to your credit card association who debits your bank and credits the merchant bank. This bank then pays the merchant.
Once a month, the total amount of your purchases are accumulated by your bank and sent to you as a bill. There is usually an interest free period, however, if you don’t pay the full amount off at the end of the month you will incur interest charges. Often, these interest charges tend to be high double-digit percentages.
Why Use Credit Cards?
Credit cards allow you to loan money for a short period of time. They also let you access an advance on your earnings. For example, if you need to buy groceries one day before payday, a credit card is handy for this.
Other benefits include:
- Providing an extra layer of protection between your money and merchants – credit card companies can detect fraud and prevent unauthorized use of your card.
- Extended Warranties and Purchase Protections – most credit cards offer enhanced product warranties, loss and damage coverage, and insurance protection
- Loyalty Reward Programs – these offer points for using the credit card. Points can be redeemed for airline discounts, cash-back rewards, or even special interest rate discounts.
How to Apply For a Credit Card?
Nowadays, applying for a credit card is a simple process of filling out an application form online. If you prefer, you can do this in person at a bank as well.
Some things the credit card provider may look at when considering your application:
- Your income
- Your Assets
- Existing debts or liabilities
- Your Credit history
Types of Credit Cards
Your personal situation will determine the type of credit card suitable for your needs.
Student Credit Cards
Ideal for students who are starting to build their credit score. They tend to have high interest rates, however.
Secured Credit Cards
Another option for those building (or rebuilding) their credit score. A secured card works by having the borrower place a deposit as a security for the credit limit. If the borrower doesn’t make payments, the deposit is forfeited.
Store cards generally accept individuals with lower credit scores, but this comes at the cost of a very high interest rate. If you are able to make payments on time, however, it could be a good way to build up your credit score.
Traditional Credit Cards
For those with good credit scores, this type of credit card offers low interest rates
Things to Consider Before Getting A Credit Card
- Interest rate – shop for the best rate.
- Fees – annual fees, fees for missed payments
- Credit Limit – cards such as the student and secured cards have lower limits
- Rewards – if you pay your card on time, these cards may be worthwhile. Rewards include cash backs, airline rewards and interest discounts.
- Balance Transfers or low rate cards – You might consider these cards if you have a credit card balance that you are trying to reduce.
Whether you need to build credit, earn rewards or borrow money a credit card is a great solution, as long as you choose the right one to suit your financial goals.