The global villager is slowly drifting from the use of hard money to the use of plastic money. Plastic money is gaining popularity because they’re portable, efficient, reliable, and a safe way to make transactions. There are a lot of things involved in the workings of a credit card. All this information can be overwhelming to a new credit cardholder.
By reading the article below, you will be able to answer the question comfortably, how do credit cards work?
What is a Credit Card?
A credit card is a plastic card that allows you access a credit limit set by your credit card company (Know more from Nerd Wallet). The credit limit differs from one cardholder to another depending on the credit worth of the holder. Credit limit elevates as the user makes more transaction using the credit card.
How does credit work?
The credit card is an unsecured revolving line of credit. You can use the card to make purchases using the card. At the end of the billing cycle, a statement detailing the amount you owe for the period is mailed to you.
The credit card company allocates you a credit limit which is based on your ability to repay. Late payments attract interests on your loan. You can use the card to make cash withdrawals or make purchases. Interests charged on purchases are lower than interests on withdrawals.
Credit Card Charges
The credit card companies charge some fees to raise some revenue. The major fees include the following.
a) Late Fees
The credit card company charges a standard minimum charge which you need to pay every month. Late payment of the fee attracts an accumulative fee that increases daily. Late payments are likely to ruin your creditworthiness with other loan providers you may need in the future.
b) Annual fees
Credit card providers charge an annual fee to cater for the benefits enjoyed by the cardholder (Check more details from The Balance). Some providers do not charge esteemed clients the annual fee. The annual interest is deducted from the available credit. The interest accrues interest if not paid within the statement period.
c) Balance Transfer Fees
The credit card allows you to make a transfer from one credit to another. A friendly fee is charged to cater for the transfer of funds. The fee is a percentage of the balance you transfer.
d) Foreign Transfer Fees
Credit cards are getting accepted globally. Making purchases in foreign currency attracts a fee from the card issuer. Some credit cards charge no fees on foreign transactions. It is best to inform your credit card provider of your foreign expedition to avoid hefty charges on your transactions.
e) Cash Advance Fees
A credit cardholder can take out cash using the card. The transaction is charged a hefty fee. You should avoid the charges if you can purchase at the moment. Interests are charged from the moment that you make the cash withdrawal.
f) Credit Card Interest
Every credit card holder is charged compulsory monthly interest charges when the grace period comes to an end. Early payments attract low or no interest rates for the month. The charged interests are relatively higher because the credit issued is unsecured.
Types of Credit Cards Available
The available credit cards can be classified into the following categories.
a) Rewards Credit Cards
The credit reward cards deliver exactly what the name suggests. Some of the available gifts include points for flights, hotel stays, and cashback rewards. Card issuers introduce new rewards to lure more people into using their credit cards to make payments.
b) Student Credit Cards
The student cards are suitable for the school-going population seeking to avoid hefty annual fees and high-interest rates. Some attractive perks, which include movie ticket discounts, are regularly introduced to lure more students into taking the credit cards.
c) Low-Interest Credit Cards
Credit cardholders enjoy low APR charges. The interest rates are best when you hold on credit card debt from month-to-month. Different card providers charge low-interest rates and while some charge zero interest during the long grace period to lure newcomers.
d) No Annual Fee Credit Card
Most credit cardholders are required to make an annual payment for catering for the services enjoyed. Some credit cards require no upfront fee no matter how long. The card is best for the credit card newcomers that are trying to understand the workings of a credit card.
e) Secured Credit Cards
Almost all credit cards available in the market are unsecured to handle riskier borrowers. Cardholders are expected to make a security deposit to receive approval from the cardholder. The amount you deposit into the account acts as your credit card limit.
f) Low Income Credit Cards
Individuals in the low-income bracket receive low-income credit cards. holders of the card are required to earn $12,000 or more to service a credit limit of $5,000
How to Get a Credit Card
Fill an online application form available on the credit card provider’s website. Provide all the relevant information needed with utmost transparency. The issuer takes a short time to check your credit reports and scores (a guide here from Social Fish) to determine your eligibility for the credit card you applied for.
Most credit card issuers respond in less than five minutes. The application process takes about 10-15 minutes to complete depending on your network connectivity and availability of your documents. Qualified candidates receive the credit card in the mail within ten days.
Requirements to Apply For a Credit Card
Most credit card providers require cardholders aging as from 18 and above. Specific cards have the requirement that holders must be aged 21 years above.
To operate a credit card, you need to earn a certain amount of money annually as a compulsory requirement. Low-income credit cardholders should be earning at least $12,000 annually.
A good Credit History
The credit card is an unsecured loan that you pay at the end of each month. Since they are unsecured, one may need to have a good credit history record to get the credit card.
Information on Your Income
You shall be required to upload copies of your income history. Employed folks may upload copies of paychecks. Self-employed individuals upload copies of tax returns as proof.
Documents of Identification
During your credit card application, you need to upload valid, verifiable documents of identification. Some of the accepted documents include a driver’s license or passports.
Advantages of a Credit Card
Holders of credit cards enjoy the following advantages.
a) The Card is Portable
The credit card is highly portable. It is like carrying bulk cash in a single card with negligible weight. You can carry the card conveniently in your wallet or one of your coat pockets.
b) Accepted in most places.
Most traders accept payments made using the credit card due to its trading power. It is not easy to get stranded at the store as long you still haven’t exhausted your credit card limit.
c) Regular Rewards
Credit card issuers encourage their clients to make more transaction suing the card by providing regular gifts. Clients receive discounts, redeemable loyalty points, and subsidized interest rates.
d) Helps in Building Your Credit history
Future lenders may need to dig into your credit history to determine your eligibility. Use your credit card responsibly to qualify for better interest rates from loan institutions.
e) Good in Keeping Track of your Finances
The credit card transactions are done electronically, thus leaving a traceable path. The credit card allows you to track your spending while keeping an eye on fraudulent transactions on your card. You are further protected from loss of money since you do not need to be carrying cash.
Disadvantages of a Credit Card
At the end of each month, you are required to clear your balance to reduce the interest rate. When compared to other loans, the interest rates on credit cards are relatively very high.
One May Overspend
The credit limit is readily available, allowing you to make independent transactions. It is recommended that cardholders should take advantage of the finances tracking options.
Possible Fraud Case
Credit cards attract fraudsters since they believe that a cardholder has plenty of money. Methods that are being employed to steal from credit cardholders are evolving each day. One cannot afford negligence and carelessness.
Expensive Charges Across the Border
Most people prefer the credit card because they are efficient for overseas use. Unfortunately, credit card companies may charge expensive rates for transactions that are made abroad.
You may have Mounting Debts
The credit companies charge relatively high interests. Failure to make a month’s payment attracts the increase of credits which you may grow reluctant to pay due to their inflated rates.
Credit Card Safety
There are numerous tactics used by credit card fraudsters, you can use the following steps to keep your account safe from foreign interferences.
- Sign your card. As soon as you receive your credit card from the cashier, you should ensure that you sign it as required of you.
- Do not leave a receipt at the ATM. Whenever you use your credit card to make a cash withdrawal, you should ensure that you take the receipt before you depart the ATM lobby.
- Protect your Credit Card Details. Do not disclose any information regarding your credit card number to anyone. Beware of merchants that may embezzle your funds.
- Maintain an emergency Call List. Have a list of emergency contacts at your disposal. The numbers will help you stop any unwanted transactions when you lose your card.
The credit cards are efficient for quick transactions from any location. To keep better track of your financial records, you should apply for a credit card if necessary. Many advantages are attached to the credit card. The major disadvantage is the high interests that clients have to pay.