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Credit Card Basics - All You Need To Know

By PolicyBazaar
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Credit cards are one of the most divisive tools among all of the financial tools that are available out there. When you ask around, you are sure to find many people who prefer paying all of their expenses using credit cards along with many others who swear that this plastic money is an embodiment of the evil. Opinions among the various financial experts are just as mixed.

Credit cards are nothing but a financial tool. Whether the effects of using one are harmful or helpful depends on the user’s skills and knowledge – a person who has the power to choose how to make use of this tool. Here is a guide briefing everything that you need to know about this tool in order to make the best out of it and taking advantage of the credit cards without falling into any sort of debt traps.

Credit cards are not everyone’s cup of tea. Like tools, if they land up in the wrong hands, they can be dangerous. If you have personality characteristics like lack of self-control at times, or if you are amidst the process to repair your existing finances, or if you are not ready for such a personal responsibility, avoid opting for a credit card until you are prepared, both emotionally and mentally.

What Is A Credit Card?

 By physical appearance, a credit card is a piece of metallic alloy, plastic, or graphite that identifies an individual’s bank account. All the credit cards contain a magnetic strip on the back, and some of them may also have an RFID chip. The account number along with the name of the owner or the business name may be printed on the front face of the card.

Behind all this, a credit card represents a sort of a financial account. By making use of credit cards, cardholders can pay for a product or service that they purchase by using the bank’s money instead of their own money, which will have to be repaid by them over time to the bank. For getting this benefit of using someone else’s money instead of their own, cardholders have to usually pay interest, similar to the types of loans. This is the area where the problems can arise. Making use of the funds of other people is often more preferable than making use of your own funds as it allows you to keep your own money handy for other purposes, but if you get yourself caught up in a situation where you have purchased something with someone else’s money while you are unable to repay the loan of that type, the results can end up ruining your financial future.

To wrap your head around the concept better, consider credit cards to be DVRs (Digital Video Recorders) for money, allowing the users to ‘time shift.’ The TV channels have a specific telecasting schedule during which they air the particular shows. If you are not free at the time your favorite show is airing, DVRs allow you to watch the show from the beginning at your time and convenience. When this is the philosophy used behind a credit card, users try their best to avoid any financial problems.

How Does A Credit Card Work?

When you choose the mode of your payment as a credit card and you hand the card to the cashier or submit the details using a secure internet connection, the merchant you are making a transaction with validates your account and check whether the bank is allowing your purchase to go through. If everything seems fine, your expenditure is added to your credit account. There are many companies involved in each swipe your card makes, and money is exchanged between all these companies involved. Merchants pay a fixed fee to accept credit card payments, and eventually, the banks that have issued the card get a part of this revenue.

Once a month, your issuer will accumulate the purchases made on your credit card and send you a bill for the same. The best option (and the one we recommend) to deal with this bill is to pay these monthly dues in full. If not, then you will have to honor at least the minimum payment that is required by the bank in order to avoid any extra fees and charges.

However, even if you manage to avoid these extra charges, interest will be charged to what you owe to the bank in the following month. Interest adds up quickly. For instance, if you have made an AED 200 purchase, it can be turned into AED 300 in no time just because of the interest charged.

When you pay your monthly dues in full, it impacts your credit score positively. This will suggest that you have good financial behavior and you are a creditworthy individual. This will help you in the future when applying for any credit option, as you will be considered a good borrower and your chances to get approved for the source of finance will increase.

Banks, as issuers of credit cards, do not want all their users to be well-behaved. The companies make profits from these types of cardholders, but the most profitable members are not the ones who do not pay bills in full, but the ones who make late payments.

Why Don’t People Favor Credit Cards?

As it is clear by this point, this plastic card makes it easier for one to spend money. Even more, scientific studies have proven that people are likely to complete a purchase if the payment mode is a credit card as compared to cash payment. Cash seems a little scarce, which makes people want to conserve it. At the same time, credit cards do not create this psychological barrier.

Also, when you are paying by cash, you cannot spend more than what you have, whereas, with a credit card, it is easy to do so. The issuer does not check your savings account before approving your expenditure. It just simply checks whether you are under the credit limit set for your card.

As a result, people do tend to spend more on their cards than they would otherwise. This just generates more profit for the banks while exposing the users to the risk of ruining their financial future. In the real world, many people allow credit cards to ruin their financial future without realizing the trap that they have entered, which is difficult to exit.

You should see a credit card as a hammer.  A hammer is a useful tool, which can help you drive in more nails than what you would otherwise. But, you are also at a risk to hurt yourself if you are not paying enough attention.

What Are The Perks of Using Credit Cards?

You must be wondering by this point in the thread, considering the potential for harm – why even use credit cards? First, time-shifting of funds can be helpful in some scenarios (for instance, you want to buy groceries for your family today, a day before your salary is credited). Additionally, credit cards can also be useful in organizing your expenses.

The 3 major benefits of using a credit card are detailed below, without which it would make all the hassle involved worthless:

Acts as a barrier between you and the merchant

 If nothing else, issuers of credit cards are good at dealing with unauthorized transactions. They create a defense wall between the fraudsters and the consumers’ money. It is always good to check the rules while opening a credit card, but in most cases, you are not liable for any such fraudulent transactions. And unlike how it is with debit cards, these unauthorized transactions do not affect your account, so you will still be having your money for any other purchases within the same day. When you pay with any other source such as cash and later discover a problem, you do not have power. With credit cards, if the merchant refuses to refund you the money, your credit card provider can reverse the transaction.

Extended warranties and purchase protection

In most scenarios, purchasing a product with your credit card automatically gives you enhanced coverage against any problems with the purchase. Many of the cards offer you an extended warranty, wherein the original manufacturer’s warranty period is extended. Whereas, some offer purchase protection, wherein if your product is damaged and the same is not covered under warranty, the bank offers you a replacement. Some cards even offer purchase price protection, wherein if the product’s price is lowered by the seller within a certain period from the purchase date, the bank will return either the entire or some of the price difference.

Rewards and offer

This is definitely one of the best tools for the marketing of credit cards. In order for an issuer to gain more customers and transactions, they offer a variety of incentives that urge new customers to apply for a card. The provider entices the card seekers with offers such as sign-up bonuses, Airmiles, cashback rewards, 0% APR, no annual fee, etc.

How Do I Qualify For and Choose A Credit Card?

In order to qualify for credit cards, an applicant must meet with the minimum eligibility criteria set by the providers across various factors, such as minimum and maximum age, monthly income, etc. For people who are just entering their credit journey without any credit history, the options available in the market are lesser. For someone holding a good credit score and history, the options are broader.

It is best to assess your needs and requirements when it comes to spending and then opt for a type of credit card that suits you in the best manner. There are numerous types of credit cards available in the market, some of the options available are:

  • A card with 0% APR for Balance Transfer facility – These cards are suitable for you if you are looking at eliminating the balances on your cards with the high-interest rate when you are unable to pay your bills in full every month.
  • A credit card for a frequent flyer – If you tend to travel with a particular airline partner then looking at a card specifically branded for that airline can help you in earning miles and other rewards on your travel. There are also travel cards in the market that are more flexible when it comes to airline partners.
  • A cashback card – These cards offer great cashback every time you use your card for any expenditure. This is a great option for someone who is not a frequent flyer.
  • A card with rewards on fuel spends – Fuel consists of a large part of one’s budget, which is why it is great to earn rewards for your expenditures on gas.
  • A card with rewards on grocery spends – There are many cards in the market that reward you for spends made at your favorite grocery store. You can accumulate these rewards and use them for your purchases at various convenience stores.
  • A credit card for small business owners – Small business owners have requirements and needs that are different from the typical everyday consumer. Some providers have cards that address the exact needs of such consumers. They often provide rewards based on business expenditures, and some of them even allow the owner to have the business name embossed on the card.

To Further Conclude

Once you are sure that you are likely to be a person who can use a credit card in a healthy manner, and you are aware of how it works, you can move on to looking for a suitable card in the market. You should study the customer reviews available online and then determine a list of options for credit cards that suit you the best.

Don’t forget to read all the terms and conditions thoroughly before signing up for a card, and make sure you are well aware of the consequences of not using your card in a proper manner. Understand the different sorts of fees and charges, along with the annual fee for holding the card before you go on to signing up for any card.