Basic Understanding of Credit Card
A form of cashless payment, credit cards are issued by financial institutions that allow the user to borrow capital in order to pay for goods and services. Credit cards can be used to make online or in-person payments and purchases.
When using a credit card to pay for in-store purchases, the user’s details are sent to their bank to process the transaction after receiving approval from the credit card company. This institution then has to confirm the cardholder’s information and either approve or reject the purchase.
Credit cards differ from debit cards by completing transactions using the credit card company’s money instead of the user’s own. And at the end of every month, a billing statement with a record of all the transactions made that month, along with the minimum payment required and its due date, is provided to the cardholder. The minimum payment is the amount required to be paid back during the grace period (the amount of time between the transaction recorded and the due date to pay it back) for credibility. Although, it is recommended that the user pay the bill in whole to avoid the requirement of having to pay interest. When not paid in full, interest is added to the bill according to the date of transaction until the time of payment.
When the bill isn’t paid in full for more than one month, the user has to pay the annual percentage rate (APR), which includes the total payment required at the end of the year, known as the annual fee, and respective interest, the rate of which may differ depending on the credit company and their terms and conditions.
For better credibility, credit card companies have a set credit limit, the amount of money the user is allowed to spend. With each purchase, the cardholder’s credit is reduced, and what has been spent from this limit is what has to be paid back. Any purchase that seeks to exceed the limit will be declined, and once the balance is paid, more credit is freed up. And to hold accountability for the user’s credibility, a credit score, the score that measures the cardholder’s creditworthiness, is recorded.
The user’s credit score, dependent on their credit history and reliability for paying their dues fees in time, is set by credit bureaus.
Credit bureaus are organizations that collect and gather an individual’s credit history and information, and then sell them for a fee to creditors, like banks. Accordingly, users can build credit and improve their credit score by paying their fees on time and making progress to pay back debts. Because, based on the credit score a bureau assigns, a creditor has the information needed to determine money lending decisions. The higher one’s credit score, the more responsible the user is deemed, and the less they may have to pay in interest for any line of credit – due to the perk of having a lower interest rate than those with low credit scores get.
Types of Credit Cards -
Rewards Credit Cards
Rewards credit cards are credit cards that generally offer cashback or reward points with every purchase made. Cashbacks can be seen as a small percentage refund of the purchase made while reward points are points that the cardholder can collect and later exchange for gifts offered by their credit card company like hotel bookings, vouchers, air miles, and so on.
Travel Credit Cards
Travel credits cards are much like reward credit cards in the sense that they offer reward points that can be collected and exchanged for gifts, but differ in the gifts offered like extra air miles, bonus baggage allowance in flights, discount offers on travel-related payments like tickets, and so on. If enough reward points are collected, travel credit cards can fully cover the total costs of travel expenses like airfare and hotels, etc.
Business Credit Cards
Business credit cards, most often used in small businesses, are very similar to standard credit cards but are better adapted to fulfill the needs of a business. For example, the rewards offered in a secured business credit card may include receiving more reward points or guaranteed cashback with every purchase from a supply store that the business often buys from. They also help in separating costs in purchases for work needs and personal needs, which helps in better financial management and building better credit scores.
Student Credit Cards
Student credit cards are credit cards better adapted to a college student’s needs. They are easy to apply for and relatively cheaper because most college students have little to no credit history. As a result, student credits cards are good for building credibility and earning a good credit score. Accordingly, student credit cards have lower credit limits and higher annual percentage rates to teach the student better responsibility and financial management.
Cash Back Credit Cards
Cash back credit cards guarantee a small percentage of your purchase back every time it’s used. The amount can generally range from 1% to 5% of the total cost of the transaction and may be directly deposited to the user’s bank account or as a gift card, check, or reduction in a due bill.
Balance Transfer Credit Cards
Balance transfer credit cards allow for the transfer of the creditcard balance amount owed on one card to another. In doing so, the cardholder no longer owes any money on that card but on the other card, which may have lower interest rates, allowing the same credit to be paid for less. However, accordingly, balance transfer cards charge a processing fee for each balance transfer.
Secured Credit Cards
Secured credit cards are credit cards reinforced by a cash installment, known as a security deposit, provided by the cardholder. The deposit acts as security and insurance, backing up the cardholder in case they cannot make their due payments in time, and the amount put down acts as the credit limit. If the account is canceled, the deposit is paid back.
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