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How does a Credit Card Work?

Ellie Bennington 0

A Credit Card is a 3.5-inch plastic card, which helps you to get through the month when you are tight on cash. It seems magical how such a small piece of plastic can help us in our problems. A person just swipes the card on a machine and purchases any product he/she wants. It might seem magical, but it isn’t. How does a Credit Card Work. You have to pay back for whatever you buy. However, if you do not use it correctly; it can cause many problems and in several cases leads a person into massive debts that accumulate a lot of interest.

How does a Credit Card Work?

Today, we will tell you everything you wanna know about the working of Credit Cards.

Should you use a Credit Card?

Before answering the question, How does a Credit Card Work, you should consider knowing whether or not a credit card is for you. Having a credit card can be expensive. This is because some companies demand a security deposit while others charge annual fees, foreign transaction fees, and other things.

A credit card is suitable for a person who:

  • Has a steady income.
  • Has the ability to make payments in full every month.
  • Who travels a lot.

If you want to keep a credit card just to be in fashion, skip it. However, you should at least know How does a Credit Card Work. It is expensive and unnecessary for many people. Now let’s get to know the advantages and disadvantages of using a credit card.

Advantages of Using a Credit Card

  • Go Cashless: Keeping vast amounts of cash in your pockets can be risky at times. E.g., in public transport like bus, there is a chance your money will get stolen. However, using a Credit Card will help you to go cashless and to keep your money safe through Fraud Protection facility provided by all companies.
  • Buy now, pay later: Using a credit card is simple. You can take money on credit and pay it off later. If you pay in the grace period, you will not have to pay any interest.
  • Safe: Even if you lose your credit card or if your credit card is stolen, you need not worry. Every credit card company provides Fraud Protection facility that will not charge you if someone else steals and use your credit card.

Disadvantages of Using Credit Card

  • Expensive: The major disadvantage of using a credit card is that it can be quite expensive. There are charges like annual fees, high-interest rates, and much more. The cost of using a credit card in foreign countries can be quite expensive.

Let’s get to the question How does a Credit Card Work.

How does a Credit Card Work?

A credit card will allow you to borrow money from your bank until a specific limit. This specific limit is known as the credit limit. A credit limit of a person depends on how confident the lender is in the person for repayment of the amount borrowed. The lender will give you a time until which you have to clear your account or repay the money borrowed. This time is like a grace period and lasts between 20-25 days — failure to clear your account beyond this. Now, you might be wondering how a bank benefits with its services for a credit card.

APR(Annual Percentage Rate)

To understand how does a Credit Card Work, it is essential to understand what is APR. APR is the rate of interest that is charged on the amount borrowed from the bank via credit card. If you are a new customer, a right bank will provide you with introductory offers like 0% APR. However, APR in most banks ranges between 10-25%. In some cases, the APR is as high as 39%.

Best Time to Pay

Every credit card company provides you a grace period that has already been explained above. If you clear your account in full until that time, you will be exempted from paying any interest. However, failure to pay an amount in that time will lead you to pay APR as well as late fees charges. The longer you ignore to clear your account, the higher the interest will accumulate and add to your balance.

See also: 10 Best Travel Credit Cards to Ease Your Adventures!

Interest Rates and the importance of Credit Scores

Interest Rates differ from bank to bank. Some Credit Card Companies charge low APR while others charge double. E.g., DCU Visa Platinum Secured Card has an APR of 13.75% while the Total Visa Card has an APR of 34%. Interest Rates also differ from person to person. If a person is regular at clearing his balance monthly, he will have a good credit score. High Credit Scores will help you to get a credit card with very low-interest rates. Thus, your credit scores are essential, and you should always try to improve them if you want to get a loan or increase your Credit Limit.

 Why should you clear your balance on time?

If you forget to clear your balance at a fixed time, you will have to pay the charge of a late fee. Moreover, some banks might take back their introductory 0% APR, and you would have to pay interest for that period too. Not clearing your balance on time will reduce your credit score that other companies will consider before issuing you their credit cards. Thus, you should always clear your balance on time.

Cash through Credit Cards

How does a Credit Card work? It also works just like your debit card. If you go to an ATM Machine and insert your credit card, you can very well get cash through its use. However, cash withdrawals through credit cards should only be made in times of utmost importance. This is because you will have to pay fees every time you withdraw cash using a credit card. This fee can range up to $10 at times. What’s worse is that you will not be told about this extra charge from your bank. Thus, always try to use a Debit Card while withdrawing money from ATM Machines. The transactions using a Debit Card are either free or will cost a minimalistic amount.

Conclusion

Well, I hope you now have the answer to the question How does a Credit Card Work. Before knowing the answer, you might have been wondering about how difficult and complex a process it might be. However, it is a very simple one. You just buy now and pay later.

See also: List of 7 Best Credit Cards For No Credit In 2019

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