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 buy money from a bank to build credit, make purchases, and 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. In most cases, banks keep this grace period between 25 to 30 days. In the case, a 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, such as annual fees, etc.
What Are the Different Types of Credit Cards?
Credit Cards are broadly classified into the following categories:
Reward Cards: Cardholders get rewards every time they use these cards. However, it's important to know that reward cards draw high annual fees and high-interest rates.
Balance Transfer Cards: Users can use these cards to reduce their interest amount by transferring their existing debt to these cards.
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.
Balance Transfer and Purchase Cards: These cards offer the benefits of both purchase as well as balance transfer cards.
Credit Builder Cards: These cards are the ideal 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.
Travel Credit Cards: Travel credit cards are an easy way to take care of one's needs and expenses while travelling.
Credit Card Pros and Cons
Credit Card Pros
If you are a smart spender, a credit card could make your life more comfortable. You will be able to buy things you like or enjoy, whenever you want. Credit cards are especially useful while travelling. Carrying cash can be unsafe. Thus, 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.