Credit card has become one of the essential online payment method, It provide several facilities for its customers. Most of you must have knowledge about credit cards, In this article you will get knowledge about credit card like What is Credit Card? How to Use Credit Card? How Credit Card works? Understand your Credit Card Statement? and so on
Credit card has many advantages. Credit card is used to buy any sort of product, some purchases also offer rewards on amount you spend. Credit card is also a useful tool to maintain credit history which is one of parameter consider by banks or other financial organisation while providing loans. If you don’t have any credit card and want to own your first credit card, then it is important understand how does they work and how to use them to earn more credits/rewards.
Key Points
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To build or rebuild your credit history, credit cards are
one of the helpful way to do it. -
Debit card is different from credit card, debit cards are used to withdraw the money from ATM/bank or to do some online purchase transactions, Credit card also provide these facility which debit card does but apart from these benefits credit card also used to borrow money for short period of time which can be repay in installment.
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It is important to understand how grace period and interest charges work to manage cost of credit.
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Credit score can go up and down based on how individual uses the credit card.
How Credit Card works
Credit card allows users to purchase any product without paying anything initially, you can pay the amount later in monthly (or other type) installment. It is like the loan only but kind of short period loan.
When you purchase any product using credit card, credit card company pay the entire amount of the product on behalf of you to the vendors/merchants. You can later payout the total amount to the credit card company with or without interest depends on the period you selected for your payment.
Every credit card has monthly or yearly purchase limit, credit card limit is offered based on user salary/income, account history and credit score of individual. Your available credit get shrinks as you complete your purchase using the card.
For Example, You have yearly $10,000 credit limit and you purchase one product of $4,000 in a month then your credit limit for rest of the year falls to $6,000, Now you will have to repay that $4,000 amount in short period of time to credit card company, and for the rest of the year you cannot buy products worth more than $6,000 using that particular card (in installment) which has $10,000 yearly limit.
Credit card company’s share detailed statement of every month on particular date (different for every company’s), which contain all our monthly activity, account balance, available and elapse limit, payment due date. This statement is useful to track your monthly credit card use.
Understand your Credit Card Statement
Every month you will receive credit card statement with all your activities,
The Statement includes
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Total Credit Card Balance
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Available Credit Card Limit
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All Purchase activity for that Specific Month
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Payment Due Date
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Minimum Payment Due
Minimum payment due is the smallest amount you can pay to credit card company for that month, For Example – If you have monthly installment of amount $100, then credit card company provides facility for users to pay only $70, to reduce the customer burden. but it is always better idea to pay more amount than minimum pay if you can.
Credit card statement also tells you, how much money you still need to pay off over time with interest. Interest on credit card can be avoided by paying your full bill amount during the grace period. Grace period is the time period of around 20 to 30 days, you have to pay off the bills before interest starts.
If you don’t payout the full bill amount then interest on that particular amount starts to accrue. Credit card Annual Percentage Rate (APR) is the important factor to decide amount of interest charged on your card.
APR decides the annual fees charged for card along with the interest on credit card.
Tip
More than one APR can be associated with one credit card. For Example – Your card may have one APR for balance transfer, one for purchases and may be another APR for cash advances. Few card companies also offer promotional APR for cards that apply to balance transfer and purchases, for limited period of time after you activate your account.
How to Use a Credit Card
Using credit cards in day to day life is not that difficult, if you purchase any product inside any store, the cashier of that store may ask you to insert your card chip inside debit/credit payment machine, if you opt for any card transactions. You can also add your credit card in digital wallet to facilitate the contactless payment also you can enable contactless payment option in particular bank applications.
When you shop goods on any ecommerce platform, you can enter your credit card information to pay the cost.
Below are the details you need to enter to continue the payment using credit card on online store
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Credit Card Number
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Credit Card Expiry Date
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Credit card CVV Security Code, usually printed on back of the Card
When you purchase any product and use credit card as a payment method then credit card company and merchant/online platform coordinate with each other to complete the payment process without any other party interference
Credit card company will pay the total amount of your product to merchant, money will not deduct from your balance, next month onwards you need to payout that amount to credit card company in monthly installments (whatever time period (in months) you selected to repay the amount, within that period amount get paid to the company)
How you use the credit card is also important factor, because calculated use of credit card can help you to boost your credit score.
Fes terms and conditions are by default applied for every credit card, some of those are
On Time Bill Payment
Payment history play important role in up/down of individual credit score. On time credit card bill payment can help you to maintain or improve credit score. On the other side, late bill payment may damage your credit score.
It is important tip for all how to use credit card, that pay your credit card bill on time Or before the due date provided.
Tip
To minimize the late payment risk, you can set up due date reminder in your credit card account or can schedule automatic payment for installment transactions.
Understand How Credit Card Interest is Calculated
If you calculate the interest charges on each product purchase, then that product will be more expensive than your expectation, if you don’t follow the terms and conditions of credit card. It is important to understand APR once you open credit card account and how interest is applied on every purchase by companies. Credit card companies provides lots of documents along with the hard copy of your card, you should read all those document to know your interest in future.
Point to remember that you can purchase the goods interest free during grace period also be aware that payment may applied differently if your balances with different interest rate, highest APR is applied first on any transaction.
Note
Credit card with 0% charges with promotional offer on balance transfer or purchases, this rate will not be applied on entire life of credit card. Any regular charges that you need to pay will be applied under regular APR after promotional period ends.
Watch Out Credit Card Fees
Credit card can charge number of fees, one of them include the charge of using them.
Most common fees you will face while using credit cards are
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Balance Transfer Fees
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Annual Fees
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Cash Advance Fees
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Foreign Transaction Fees
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Returned Payment Fees
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Late Payment Fees
All these Fees and APRs are listed in your credit card agreement, also document received along with hard copy of credit card, these charges are also listed on website/pages from where you apply for credit card. Many cards don’t charge any annual fees. You can also earn some rewards point on each card transaction which you can encash in your bank account.
If you are planning for any foreign trip then you should opt for the card that does not have any Foreign Transaction Fees.
Always Check Your Balance
Credit Utilization History is the second important factor that affect your credit score after payment history. It measures how much credit you used at a given time period. You should follow one practice to keep your card balance lower relative to your credit card limit. This may drop credit score if you maximize balance of card, which notify the lenders that you are a high risk borrower.
Tip
If you carry balance in credit card that will improve your credit score, which is the common myth. Actually carrying more balance can hurt your credit score as you are using more than available limit.
Credit card is easy to use, This article explains how to use credit card, we do not recommend any company credit card, before opting for any card, you should check all terms and conditions associated with the card, hidden charges, Interest details.
Thank You
