A credit card is a payment card that holds the bank’s money. When you pay for a purchase with your credit card, you borrow the funds from the bank and then pay them back. The bank’s actions are legal and subject to a number of established rules. If you follow these rules, you can even earn money at the bank.
Where can I pay by credit card?
You can pay with a credit card on the Internet, shops, cafes, restaurants, pharmacies, and shopping centers – that is, wherever bank cards are accepted. From a store’s point of view, debit and credit cards are no different.
When is a credit card useful?
- Urgent expenses. It is convenient to pay with a credit card for purchases that will not wait until you get your next paycheck – for example, you need to buy a winter coat with a good discount or discounted tickets;
- An alternative to a personal loan. A credit card is always on hand for payment, which is better than waiting for approval for a personal loan. You can easily pay with a credit card on the Internet and at the checkout in the store;
- Everyday shopping. You can pay with a credit card without interest – if you give money to the bank on time. You ca also get bonuses for spending and return the entire debt to a credit card before the due date – then the bank will charge no interest;
- Paying bills. You can use a credit card to pay for utilities or a taxi;
- A deposit for a hotel reservation, apartment or car rental. No interest is charged because the deposit is not debited from the card but only temporarily blocked. It’s better to freeze the bank’s money than your own. Let’s say you rent a car. You are asked to leave a deposit of $1,500, and you give your credit card. Money is frozen on the card. When you return the car without any problems, the rental company releases the block from the amount of the deposit. There were no transfers from your card, so you do not pay interest.
Let’s start by looking at the main pros and cons of a credit card. The advantages of this product include the following parameters:
- Grace period. This is the name of the period during which the credit card can be used without interest. If you fully repay the debt within this period, you can use the card without overpayments. The grace period can last from 50-55 to 100-200 days;
- Revolving line of credit. After paying off the debt, the card can be used again on the same terms. The credit limit is renewed continuously until the card is closed;
- Versatility. A credit card can be issued for any purpose – for everyday use, paying for large purchases, for travel… There are many different offers on the market – it is easy to choose the appropriate credit card for your purpose;
- Bonuses for purchases. Banks are introducing various bonus programs for credit cards – cashback, points accrual, discounts, and others. This way they stimulate non-cash purchases using cards.
A credit card has several drawbacks to consider:
- High interest rates. They can be two or three times higher than that of a personal loan issued under similar conditions. The rate depends very much on the solvency and reliability of the borrower;
- Restrictions on some operations. A credit card usually does not allow cash withdrawals and transfers. For these operations, the bank charges a high commission, and sometimes – stops the grace period and raises the interest;
- Fraud risk. Credit card security must be monitored very carefully. If a credit card or its data falls into the hands of a fraudster, then you risk getting a large debt to the bank;
- Psychological aspect. Using your credit card correctly will require a certain level of financial literacy and ability to plan your expenses. If you spend more than you earn, use your card incorrectly and make payments late, you can get a very large debt.
Credit card vs debit card
Some people confuse a credit card with a debit card. A debit card usually always contains a positive balance of funds, which are the property of the cardholder. People save money on debit cards, receive wages or income from their deposits on them. On the contrary, credit cards imply access to the bank’s funds and are used when you have no own funds.
Credit card tips to help avoid common problems
- Carefully read the agreement, all attachments to it and compare offers and conditions of different banks;
- Pay off the debt on time, if possible, without going beyond the grace period;
- Pay using a card, try not to withdraw cash from an ATM;
- Choose loyalty programs that are interesting for you, get bonuses;
- And remember that you will have to repay your loan in any case, even if the bank’s license is revoked.