What is Credit Card?
Up to a predefined credit limit, a credit card is a plastic payment card that is provided by a financial institution, usually a bank, enabling the cardholder to borrow money for purchases or cash advances. Credit cards offer consumers a line of credit that may be paid back in full at the end of the monthly cycle or over time, making them a popular and flexible form of payment.
Here are key features and components of credit cards:
Credit Limit: The credit limit is the maximum amount of money that a cardholder is allowed to borrow on the credit card. It is determined by the card issuer based on factors such as the cardholder’s creditworthiness, income, and financial history.
Cardholder Agreement: When a person is approved for a credit card, they enter into a cardholder agreement with the issuing bank. This agreement outlines the terms and conditions of card use, including interest rates, fees, and repayment terms.
Interest Rates: Credit cards often come with an annual percentage rate (APR), which represents the interest charged on any outstanding balance that is not paid in full by the end of the billing cycle. The APR can vary based on the type of transaction (purchases, cash advances) and the cardholder’s credit history.
Grace Period: Many credit cards offer a grace period, typically between 21 and 25 days, during which the cardholder can pay the balance in full without incurring interest charges. If the full balance is not paid by the due date, interest accrues on the remaining balance.
Minimum Payment: Credit card statements include a minimum payment amount, which is the smallest amount the cardholder must pay by the due date to keep the account in good standing. Paying only the minimum, however, will result in interest charges on the remaining balance.
Rewards and Perks: Some credit cards offer rewards programs, cashback, or other perks to incentivize card usage. Rewards can include points, miles, or cash rebates based on the amount spent using the card.
Security Features: Credit cards often have security features such as chip technology and PIN numbers to protect against fraud. Additionally, many credit card issuers offer zero liability protection, meaning the cardholder is not held responsible for unauthorized transactions.
Credit Score Impact: Credit card usage and payment history can impact an individual’s credit score. Responsible use, such as making timely payments and keeping balances low relative to the credit limit, can positively influence credit scores.
Global Acceptance: Credit cards are widely accepted for both online and in-person transactions around the world. They provide a convenient and secure method of payment.
How Credit Cards works?
Credit cards work by providing cardholders with a revolving line of credit, allowing them to make purchases or access funds up to a predetermined credit limit. Here’s an overview of how credit cards work:
Application and Approval:
Individuals apply for a credit card through a financial institution, such as a bank or credit card issuer.
The application process typically involves providing personal and financial information, including income, employment details, and credit history.
The credit card issuer evaluates the applicant’s creditworthiness to determine whether to approve or decline the application.
Credit Limit:
Once approved, the cardholder is assigned a credit limit, which is the maximum amount they can borrow on the credit card. The credit limit is determined by factors such as the individual’s credit history, income, and financial standing.
Card Activation:
Upon approval, the credit card is issued to the cardholder. To activate the card, the cardholder usually needs to follow the issuer’s activation process, which may involve calling a phone number or activating the card online.
Card Usage:
With an activated credit card, the cardholder can use it to make purchases at various merchants, both in-store and online.
The cardholder can also use the credit card for cash advances at ATMs, although cash advances often come with additional fees and higher interest rates.
Billing Cycle:
Credit cards operate on billing cycles, usually lasting around one month. During this period, the cardholder can make purchases up to their credit limit.
The billing cycle ends with a statement period, and the cardholder receives a monthly statement detailing all transactions, outstanding balances, and payment due dates.
Grace Period:
Credit cards often come with a grace period, typically between 21 and 25 days, during which the cardholder can pay the full balance without incurring interest charges.
If the full balance is paid by the due date, no interest is charged. This grace period is a key feature that distinguishes credit cards from other forms of debt.
Interest Charges:
If the cardholder does not pay the full balance by the due date, interest charges apply to the remaining balance. The interest rate, known as the annual percentage rate (APR), varies by card and is specified in the cardholder agreement.
Minimum Payment:
Credit card statements include a minimum payment amount, which is the smallest amount the cardholder must pay by the due date to keep the account in good standing.
Paying only the minimum, however, results in interest charges on the remaining balance.
Credit Score Impact:
Credit card usage and payment history impact an individual’s credit score. Responsible use, such as making timely payments and keeping balances low relative to the credit limit, can positively influence credit scores.
Security Features:
Credit cards often come with security features such as chip technology and PIN numbers to protect against fraud. Many credit card issuers also offer zero liability protection for unauthorized transactions.
Rewards and Perks:
Many credit cards offer rewards programs, cashback, or other perks to incentivize card usage. Rewards can include points, miles, or cash rebates based on the amount spent using the card.
It’s important for credit cardholders to use their cards responsibly, be aware of the terms and conditions, and manage their credit wisely to avoid accumulating high-interest debt. Responsible credit card use can also contribute positively to an individual’s financial profile and creditworthiness.
Difference between Credit Card and Debit Card?
Credit cards and debit cards are both payment cards that look similar, but they function differently and have distinct features. Here are the key differences between credit cards and debit cards:
Source of Funds:
Credit Card: When using a credit card, you are essentially borrowing money from the card issuer up to a predetermined credit limit. The funds used for purchases are not directly taken from your bank account.
Debit Card: Debit cards are linked directly to your bank account. When you use a debit card for a purchase, the funds are immediately withdrawn from your checking or savings account.
Credit Limit:
Credit Card: Credit cards have a pre-approved credit limit, which is the maximum amount you can borrow. This limit is determined by the card issuer based on factors such as creditworthiness, income, and financial history.
Debit Card: Debit cards do not have a credit limit since they are tied directly to the available balance in your bank account.
Borrowing vs. Own Funds:
Credit Card: With a credit card, you are essentially borrowing money, and you are required to pay it back by the due date to avoid interest charges.
Debit Card: When using a debit card, you are using your own funds. The purchase amount is immediately deducted from your bank account.
Interest Charges:
Credit Card: If you don’t pay the full credit card balance by the due date, you will incur interest charges on the remaining balance. The APR (annual percentage rate) determines the interest rate.
Debit Card: Since debit card transactions are immediately funded from your bank account, there are no interest charges associated with debit card usage.
Overdrafts:
Credit Card: You can potentially overspend beyond your current financial means, leading to a negative balance, but this will result in interest charges.
Debit Card: Overdrafts can occur if you spend more than the available balance in your account, leading to potential overdraft fees. However, some banks offer overdraft protection.
Building Credit History:
Credit Card: Responsible use of a credit card, including making timely payments, can positively impact your credit history and credit score.
Debit Card: Debit card transactions do not affect your credit history or credit score since you are using your own funds.
Rewards and Perks:
Credit Card: Many credit cards offer rewards programs, cashback, or other perks to incentivize card usage. These rewards are based on the amount spent using the credit card.
Debit Card: While some debit cards offer limited rewards, they are generally not as robust as those provided by credit cards.
Acceptance:
Credit Card: Credit cards are widely accepted globally, allowing for flexibility in various transactions, including online and international purchases.
Debit Card: Debit cards are also widely accepted, but some international transactions may require a credit card due to differences in processing.
In summary, credit cards involve borrowing money up to a credit limit, with the potential for interest charges, while debit cards directly access funds in your bank account. Both types of cards offer different advantages and considerations, and the choice between them often depends on personal financial preferences and needs.
what are advantages of having Credit card?
Having a credit card offers several advantages, provided they are used responsibly. Here are some key benefits of having a credit card:
1.Convenience:Credit cards provide a convenient and widely accepted method of payment for in-store and online transactions. They eliminate the need to carry large amounts of cash.
2.Emergency Expenses:Credit cards can be a financial safety net during emergencies or unexpected expenses. They provide immediate access to funds, allowing you to cover essential costs when needed.
Builds Credit History:
3.Responsible use of a credit card can help build a positive credit history. Timely payments, low credit utilization, and a longer credit history contribute to a higher credit score, which is essential for obtaining favorable loan terms in the future.
Credit Score Improvement:
4.Regular and timely payments on your credit card can positively impact your credit score. A higher credit score may lead to better interest rates on loans and improved financial opportunities.
Rewards and Perks:
5.Many credit cards offer rewards programs, cashback, or travel perks. Cardholders can earn points or cash back on purchases, receive discounts, and access exclusive benefits such as airport lounge access or concierge services.
Grace Period and Interest-Free Period:
6.Credit cards typically come with a grace period during which you can pay your balance in full without incurring interest charges. This feature can be advantageous when managing cash flow.
Fraud Protection:
7.Credit cards often provide robust fraud protection. If your card is lost or stolen, you can report it to the issuer, and you are generally not held responsible for unauthorized transactions.
Purchase Protection:
8.Many credit cards offer purchase protection, which can include extended warranties, price protection, and coverage against theft or damage for items purchased with the card.
Travel Benefits:
9.Travel credit cards often come with benefits such as travel insurance, rental car insurance, and no foreign transaction fees. Some cards also offer travel rewards and discounts on flights and hotels.
10.Building Credit for Major Purchases:.A positive credit history established through responsible credit card use can be crucial when applying for mortgages, car loans, or other major loans. It may result in better interest rates and loan terms.
Credit Monitoring Services:
11.Some credit cards offer free credit monitoring services, allowing cardholders to keep track of changes in their credit report and receive alerts for potential identity theft.
AutoPay and Bill Management:
12.Many credit cards offer automatic payment options, allowing you to set up automatic payments for the minimum or full balance. This can help you avoid late fees and manage your bills more efficiently.
Building Financial Discipline:
13.Responsible credit card use requires financial discipline. It encourages budgeting, tracking expenses, and developing good financial habits.
While credit cards offer numerous advantages, it’s crucial to use them responsibly to avoid accumulating debt. Paying the full balance on time, keeping credit utilization low, and understanding the terms and fees associated with the card are essential practices for maximizing the benefits of having a credit card.
How to get one Credit card for yourself?
Getting a credit card as a newcomer or someone with limited credit history may require a strategic approach.
Here are steps to help you get a credit card as a newbie:
1.Understand Your Credit Score:Before applying for a credit card, it’s helpful to know your credit score. Newcomers may have limited or no credit history, resulting in a lower credit score.
2.Start with a Secured Credit Card:Secured credit cards are designed for individuals with limited or no credit history. They require a security deposit, which becomes the credit limit.
Responsible use of a secured credit card can help build or establish credit. After some time, you may qualify for an unsecured card.
3.Research Credit Card Options:Look for credit cards specifically designed for newcomers or those with limited credit history.
Some credit cards have easier approval requirements for individuals who are new to credit.
Consider Student Credit Cards:If you are a student, consider applying for a student credit card. These cards are designed for students and often have more lenient approval criteria.
4.Explore Starter Credit Cards:Some credit card issuers offer starter credit cards designed for individuals with limited credit experience. These cards may have lower credit limits and more accessible terms.
5.Apply for a Retail Credit Card:Retail credit cards, which are associated with specific stores or brands, may be more accessible for newcomers. These cards often have easier approval requirements.
6.Apply for a Joint Credit Card:If you have a family member or friend with good credit, consider applying for a credit card jointly. This can improve your chances of approval, as the credit card issuer considers the credit history of both applicants.
Apply for a Credit Card with a Co-Signer:
7.A co-signer with a strong credit history may increase your chances of getting approved for a credit card. Keep in mind that the co-signer is equally responsible for the debt.
8.Build Credit with Alternative Methods:If you’re having difficulty getting approved for a traditional credit card, consider alternative methods to build credit, such as becoming an authorized user on someone else’s credit card or using credit-builder loans.
9.Provide Proof of Income:Credit card issuers may require proof of income during the application process. Ensure that you can demonstrate a reliable source of income to improve your chances of approval.
10.Apply for a Low-Limit Card:Initially, focus on credit cards with lower credit limits. These cards are often easier to qualify for and can help you establish a positive credit history.
11.Apply Online or In Person:You can apply for credit cards online through the issuer’s website or in person at a local branch. Online applications are convenient, but if you have questions, visiting a branch allows you to speak with a representative.
12.Be Patient and Persistent:If your initial application is declined, don’t be discouraged. It may take some time to build credit. Consider reapplying after a few months or explore other credit-building options.
13.Read and Understand the Terms:Before applying, carefully read the terms and conditions of the credit card. Pay attention to fees, interest rates, and any introductory offers.
Remember that building credit is a gradual process, and responsible use of credit is essential. Pay your bills on time, keep your credit card balances low, and avoid taking on more credit than you can manage. As your credit history improves, you may become eligible for credit cards with more favorable terms and rewards programs.
You can watch the video below in the link about Credit cards:
https://youtu.be/0ddgrHehprk?si=kcohrSzaSgel20NZ