Credit Cards are an easy and convenient way to pay for purchases of any sort. They are so ubiquitous and universally accepted that they are sometimes referred to as plastic money or just plastic!
Let’s take a quick look at how credit cards work.
Simply put a credit card is like an easy way to get a short term advance. When you apply for a credit card and the Bank issues you one, you get a set credit limit along with it. This is the total amount of credit that the Bank is willing to give you – which means, you can use your card to spend up to that much of money.
You can use your Credit Card to buy from online or brick and mortar stores. And when you do that, your card details are sent to both your bank as well as the merchant’s bank. Your bank will verify your information and authorize or decline your transaction. If the transaction is authorized by your bank, then your bank pays the merchant’s bank and the amount of available credit in your Credit Card account comes down.
Once a month, you will get a statement from your Bank, giving you a list of all the purchases you made in your account during that time. The statement will include the total amount you need to pay along with a minimum amount due. Minimum Amount Due refers to the minimum amount of money that you need to pay the Bank to avoid being delinquent. It will also include the date, before which, you need to pay. The statement will include any payments you have made to your credit card account in the last month, and if you have carried forward any of the charges or interest from the previous billing, without paying the full amount, further interest on those charges.
There is a certain amount of time between the date you actually bought something and the date you need to make a payment for it. If you are the kind that pays your credit card bills in full, without carrying anything forward into the next billing cycle, then you won’t be charged any interest! But if you do not pay the full amount that is due, or pay only the minimum amount due, and carry some of the amount to the next month, then you need to pay interest. The rate of interest that is charged by your Bank will be listed there for you.
Fees and Charges
You could pay an annual fee on your Credit Card, depending on the type of credit card that you have. Some charge you a certain amount that is billed to you every year. Some Credit Cards come to you free for the first year and then you are charged for it in the subsequent years.
If you pay late – on a day that is past the due date mentioned in your statement or Credit Card bill, then you will incur late payment charges.
And if you carry forward a billed charge without paying for it fully, you will be charged interest.
How you manage the credit given to you on your credit card, has a lot of impact on your Credit rating or Credit Score. Are you the kind that uses it sparingly and carefully? Or do you max out your credit and pay only the minimum amount due? Are you a revolver (carrying some charges to the next month) or a full-payment person? Do you miss payments altogether? All these factors have an impact on your credit rating.
Some cards help you earn some of the money you spend on it, back. This can be in the form of Reward Points that add up and you can redeem these for various things that include air miles, actual cash back, vouchers that can be used at various places, and several products listed in the Rewards catalogue.
At the end of the day, a Credit Card needs to be used prudently and wisely. It is always a good thing to live within your means, and not splurge on things beyond what you can afford. And when you are not able to pay off the whole amount that you spend on your card each month, you end up in a huge mess, paying a lot of interest. So use your Credit Card wisely and well.