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If you are someone who can remain disciplined with their spending, a credit card can be a convenient way to pay for goods and services.

What Is a Credit Card?

Credit Cards allow users to borrow money from a bank to transfer debts, build credit, make purchases, or just meet their everyday needs. All credit cards have a fixed upper credit limit, which banks decide based on various factors, including the card holder's annual income, employment status, current debt, and credit history and score.

How Do Credit Cards Work?

Banks give credit to cardholders, which they must return before the grace period decided by the bank. If a credit card user is unable to return the borrowed amount within the stipulated time period, the bank charges interest, which is a percentage of the money the user has borrowed from the bank. Credit card companies make money through transaction fees, interest payments, and other fees.

What Are the Different Types of Credit Cards?

Credit Cards are broadly classified into the following categories:

Balance Transfer Cards: Users can use these cards to reduce their interest amount by transferring their existing debt.

Purchase Cards: These cards are the ideal choice if you are planning to make a big purchase as they allow users to borrow money at 0% interest rate. However, banks usually save these cards for people with excellent credit scores.

Reward Cards: Cardholders get rewards every time they use these cards. However, it's important to know that reward cards generally draw high annual fees and high-interest rates.

Credit Builder Cards: These cards are the usual choice if you want to improve your credit rating. However, do remember that these cards have high-interest rates and low credit limits.

Money Transfer Cards: If you want to transfer cash from your credit card to your bank account, you will need a money transfer card.

Credit Card Pros and Cons

Credit Card Pros

If you are a smart spender, a credit card could make your life more comfortable. Credit cards can be useful while travelling as carrying cash in unfamiliar places can be unsafe. Some people opt only to carry their credit card along with them on trips. Most credit cards offer incentives to users. In most cases, this incentive is equal to 1% of the total spending.

Credit Card Cons

If you are an impulse buyer and tend to overspend, you may end up ruining your credit score and creating unmanageable debt. Missing a single payment can negatively impact your credit rating. Credit cards charge high-interest rates, and thus, even a small loan can become significant over time.

Looking for impartial advice on your finances? The Money Advice Service offers free advice, set up by government.
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