How Credit Cards Work : Credit Card Basics You Must Know

Thinking about getting a new credit card? Syed has an awesome guest post today that will teach you everything you need to know about credit cards. In this post you'll learn all the credit card basics you must know to understand how credit cards work.

How Credit Cards Work : Credit Card Basics You Must Know

How Credit Cards Work : Credit Card Basics You Must Know

The way a credit card functions can be quite confusing. A credit card is the first option most people use to start building their credit history as it is lenient with the repayment. 

You can or cannot make the full amount repayment at the end of the month, you can carry forwards the balance after paying the minimum amount due which makes it better than other types of debts. 

Read on to know the basics of a credit card if you are getting a credit card for the first time or if you are in a huge credit card debt and want to undo the damage. 

How Credit Cards Work

A credit card is a card that will keep track of your debt. You can use the credit card to make any payments. You instantly get a message that shows what you owe the bank at the end of the month. 

The credit card will not charge any interest on the amount due if you are clearing the balance at the end of each month. But, if you are carrying forward the balance, you will have to pay the interest on the amount. 

People take credit cards because they can use it in cases of emergencies when there is no cash in hand. Take a credit card if you are sure that you can clear the bill at the end of every month. 

Credit cards also helps in building your credit history and credit score. The credit bureau will have a record of all the bills you pay in full and on time. This will give you a good score and help you when you need to borrow money in the future from a financial institution.

Why You Need A Credit Card

If you have a lot of money saved in the bank you may think you will not have to borrow money. But, there might be some unavoidable circumstances when you are financial situation is bad and you need to borrow. Therefore it is vital that you always have a good credit score so that you can get financial help at the time of need. 

You will need credit when you are buying a house, car, property etc. It is important to have a good line of credit before you need it. A credit card is the simplest way to start building your credit history. 

You can use it to your advantage. You can make small purchases on the card and clear the balance at the end of each month, thus improving your credit score. This will ensure that the lenders will lend you money without any second thought. You will be in a position to bargain the terms and conditions and rates on the future loans you take.

Learn more on how to improve your credit score.

Things to Know Before Applying for a Credit Card

Here are the things you must familiarize yourself with when applying for a credit card:

  • Interest rate: You need not bother about the interest rate if you intend on using your credit card cautiously. If you are clearing the balance at the end of each month, you won’t be charged any interest. If you are carrying the balance forward to the next month, then you will be charged interest on the balance. The cash advance will be charged a higher interest than the transactions made at the point of sale terminals. The interest will be calculated on an average daily balance.

  • Annual percentage rate: Most cards charge an annual fee. Make sure you are aware of the rate and try and negotiate this fee with your bank and get it waived or lowered. If the APR is high, you might want to consider shifting to other providers.

  • Balance transfer fee: If you are planning on transferring your credit card balance to another provider, you must know that your bank will charge you a fee for the transfer. Read through the documents to know how much rate will be charged.

  • Rewards: Most banks offer rewards on every transaction made using the credit card. You must go through the various rewards offered and then choosing the one that will suit your lifestyle so you can make the most of it.

  • Rewards redemption: Rewards are attractive and the banks will try and lure you to taking a credit card with the rewards being offered. But, you must be aware that there will always be a minimum requirement set. So, make yourself aware of them before you take on the rewards. The bank will also charge a reward redemption fee. Most time it so happens that to earn the rewards, you will end up using the card more and that might lead to you buying unnecessary things and you will be in a bigger debt. Be wary of these offers and take advantage of the rewards that will suit your lifestyle and requirement.

  • Cash withdrawal: Cash withdrawal is allowed by most banks. A certain percentage of your credit card amount sanctioned is set aside for cash withdrawal. Though it may come in handy, you must remember that this is not the amount you have, it is the amount you will owe the bank and the banks usually charge a high interest rate on cash withdrawals.

  • Special privileges: If you are a traveller, it makes sense for you to take a travel card so you can make use of the special privileges that accompany the card. You get free lounge access and other stuff. There are credit cards with different functions. Go through all your options before you settle on one.

  • Secured credit card: Yes, you read that right, you can take a secured credit card that can be backed by cash deposit that will act like a collateral and a percentage of that deposit will be the card’s limit. Secured credit card can be taken by those who want to build a great credit history. The interest rate for the secured credit card will be lower than that offered for an unsecured credit card.

  • Grace period: You must know the grace period offered to you. The banks offer 21 – 25 days grace period beyond which you will be charged interest on the balance amount.

  • Minimum payment due: Minimum payment is the minimum amount you have to pay the bank each month. If you are unable to clear the total balance at the end of the month, you can pay the minimum amount and save yourself from damaging your credit history. Minimum payment due maybe a certain percentage of the balance due that ranges from 1 – 3%. The other way that minimum payment due is ascertained is that the bank will take a percentage of the amount you owe and add the applicable fees and interest.

  • Affect your credit card will have on your credit score: Your credit score takes into consideration 5 factors. The 5 factors are payment history that is 35% of the score, credit utilization that is 30% of the score, length of credit history that is 15% of the score, 10% of the score is for the type of accounts in use and 10% for the new credit.

  • Security: It is important that you get an EMV chip embedded credit card as it requires two step verification and secures your card from fraud and identity theft.

  • Late payment fee: Late payment fee is charged if you are paying the amount due on a day post the due date. This fee can be avoided if you make the payments on time.

  • International transaction fee: Most cards are accepted worldwide. But, the catch is that the rate is higher for the international transactions even though the rewards offered are higher. If you travel a lot, make sure that you bargain with the bank to reduce the International transaction charges.

  • Credit limit: The bank sets a credit limit based on your income and keeping in mind that you have other debts. When you are making use of the credit card, do not utilize the whole credit that is available to you. If you utilize all the credit, it will be difficult for you to avail more credit. Even if you are able to, the interest rate will be higher and that may further put you in more debt. Keep at least 40% of the credit limit untouched. It shows that you know how to efficiently make use of the credit and manage your finances efficiently.

Before you take a credit card read through the entire terms and conditions document. Understand all the fees that are applicable.

Choose a card that will suit your lifestyle. Don’t take the first card that will be offered to you. Shop around look for cards offered by other providers. Make sure that you compare the cards before you take one.

Remember that if you pay your balance each month you won’t be charged any interest and aim for this. Use the credit card only in times of emergencies and to build a good credit history. Do not cross your credit limit and do not make use of the cash advance facility. 

Brought to you by Syed from

If you love what you're reading, please help me spread the word and share this post with the share buttons on the left!