How Do Credit Cards Work?
Despite their popularity, not many people understand how credit cards work. Anyone can get a credit card, but only a responsible person will know how to use it. Whether you’ve used a credit card before or not, this article will help you learn all there is. Read on for the ultimate guide to credit cards.
What Is a Credit Card?
A credit card gives you a revolving line of credit to make purchases or payments. Once you borrow money, you’re expected to pay interest on what you owe. If you repay the borrowed amount, you can borrow again. Payments need to be made every month if you have a balance.
A bank issues a credit card. The bank or credit card provider establishes a credit limit. The maximum amount of money you can spend on the card is referred to as the credit limit.
You’re expected to pay the balance every month. The credit card company charges interest on the outstanding balance if the monthly balance is unpaid.
Most credit card companies charge an annual percentage rate (APR) for carrying the balance over the course of one year. APR is based on the prime rate.
For example, your card has an APR of 20 percent. Your monthly unpaid balance is $500. In this case, you’ll end up paying 20 percent of $500, or $100, in interest over the course of the year.
Pros of Having a Credit Card
A credit card is a simple, convenient way to make payments and purchases. You can just swipe and pay for petrol, groceries, lunch, or a smartphone.
Credit cards offer several benefits: – Cashback and rewards – Purchase protection – Airline miles and travel discounts – Fraud protection – Identity theft safeguards
Types of Credit Cards
– Unsecured credit cards Unsecured credit cards are the most popular as they don’t need a deposit.
– Secured credit cards You can improve your credit history by using a secured card. The card must be “secured” by depositing funds into an account. The credit limit on your card depends on the amount you deposit.
– Rewards credit card These cards help you earn airline miles, receive points, or get cashback every time you spend. They often have a higher interest rate or an annual fee.
– Low-interest rate credit card Many banks use low- or even interest-free credit cards to attract new applicants. These are good for people who want to make a big purchase and can pay off the balance before the offer expires.
