You must have ever come across the idea of owning a credit card. Given the facilities it offers, it is not surprising that a lot many people use them to facilitate their purchases. But do you know how exactly a credit card works? What are the types of cards that you can avail of? How credit card interest works? We will address questions like this in the following sections.
What Is a Credit Card?
A credit card is issued by financial institutions or banks. It allows users to take credit from their pre-approved funds and make payments. You get to use the card with merchants who accept payments made from credit cards. So, before you can use your card to make a purchase, ensure that the shop owner has the required facility. Also, there are various kinds of credit cards that money lenders offer. You can choose what suits you best.
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Types of Credit Cards
Credit cards are of different types. Some of the commonly used credit cards are discussed here.
● Reward Credit Card – This card is used for obtaining reward points against purchases made using this.
● Secured Credit Card – This card is meant for people who have no credit history or have a bad history. These cards are obtained against a fixed deposit. The credit limit is usually equivalent to the deposit amount.
● Shopping Credit Card – This card can be specifically used for purchasing goods or clothing in an online or offline store. The benefit of this card is that it provides shoppers with discounts and cashback.
● Business Credit Card – This card is designed for the use of businesses. It allows business owners to keep a track of their business transactions that are done using credit cards.
● Student Credit Card – This is a card for the use of college students who probably have no credit history. These cards allow students to pay for their educational resources.
How Do Credit Cards Work?
Now let’s see how your credit line works. To use your credit card for purchasing at an offline store, you need to swipe your card in a card reader. The machine reads the security chip on your card and deducts the amount from your account that you key in. When using your card at an online store, you need to key in your card number, name, billing address, security code, and expiration date. Once you authorize the payment, your amount gets debited from your account. Note that your credit card account limit is predetermined. The amount is fixed based on your credit history.
Post using your card, your account balance becomes equivalent to the amount of purchase done. You are liable to pay back the amount to your lender at the end of the billing cycle. Once paid back, your credit balance goes back to the original amount. Meaning if you have a credit limit of Rs 500 and you borrow Rs 300, your repayment will again make your limit Rs 500. But remember that you have a certain period to pay back, failing of which would attract interest. This is how credit card minimum payments work.
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Credit card interest
Your card lender usually gives you a period of 21 to 25 days to pay back the money you used from your credit limit. This is called a grace period. If you fail to pay your bank within the grace period then your bank levies interest on the amount. You can check the interest rate in the annual percentage rate of your card. This rate chart can also give you information about any annual fee that your card might be subject to.
The rate of interest depends on your card type, credit history, and the interest rate prevailing in the market. Apart from the interest rate that your card operates on, you must also pay heed to some precautionary measures.
Checkpoints
Some of the safety measures that will facilitate your credit card use are listed here.
● Sign your credit card to prevent fraudulent activities
● Secure your card with a strong and complex password
● Do not expose your card to public places to conceal the card number
● Avoid saving card details on online payment gateways
● Make online transactions with merchants that have HTTPS on their website address
● Use a private network instead of public Wi-fi while using your card online
● Stay updated about the recent activities of your account
Now that you know about some of the precautionary measures when using a credit card, let’s find out how a credit card is different from a debit card.
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Credit Card vs. Debit Card
Some essential differences between a credit and debit card are discussed in this section.
1. Credit cards allow you to borrow an amount from the bank and pay it within the due date. Debit cards, on the other hand, let you use the money you have already stored in the bank.
2. Credit cards allow you to spend more than the amount you currently have. But a debit card puts a limit on your expenses based on the money you own.
3. The fees levied on a credit card are much more than those placed on a debit card.
Thus, a credit card allows you to take credit from a money lender and make purchases. You can either opt for a business card, a student, secured card, shopping card, a reward card, or any other variant. But remember to pay back the amount within the due date to prevent finance charges.
Key Takeaways
● Credit card is provided by financial institutions
● The credit limit is determined by your credit history
● Your bank charges only after you authorize the payment
● Credit card use is limited by merchants who accept them
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