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How Do Credit Cards Work? – A Complete Guide to Credit Card Basics for Personal Finance Newbies

2 Mins read

In a world of fast food and fast fashion, the need for digital money is increasing. With this increase in demand, the options available regarding the cards that banks offer have gone to an all-time high. It is, therefore, crucial to know what card suits you best and why credit cards might be your best option.

What Is a Credit Card?

It is a physical card that your bank issues to you. It lets you pay bills and withdraw cash without having any money in your account. Banks issue you a specific credit limit, and you can spend money till the specified amount. This means the function of a credit card is similar to that of a loan. You must pay the money you use monthly or according to the timeline you have set with your card issuer.

How Do Credit Cards Work?

Whenever you buy something, be it virtual shopping or physical purchases, and want to pay via your credit card, you give in details required to the seller. Once you have given your details, your card issuer approves or disapproves your transaction. This approval and disapproval depend on your remaining amount on the credit limit. In case some money is left to be spent, you get approval and vice versa. It is essential to keep the credit limit in mind when purchasing things.

Once you reach the end of your monthly billing cycle, your bank sends you a bank statement showing all purchases and transactions. The statement also includes the balance that has to be paid with the due date. The time till the due date is known as the grace period where the bank charges no interest. It is preferred that you pay your remaining balance in that assigned time. In case you’re unable to pay it, interest is charged on the rate you have been informed about while you issued the card from the bank.

Essential Things to Know Before You Get a Card

There are certain things you should know before getting yourself a credit card. The first and most important thing that you should be aware of is that you have to pay some amount to the bank each month even if you have paid the balance and are not on interest. Secondly, you have to manage your credit points based on your timely payments, frequency of usage, and bank account balance. A good credit score enables you to avail yourself of a lot of perks with the card.

Pros of Credit Cards

•     It is easy to use

•     Safer and convenient

•     Let’s you avail multiple offers and discounts

•     Easy to buy things you need but don’t have money for

Cons of Credit Cards

•     You have to be above 18, or sometimes above 21, to get a card

•     There are additional charges and hidden payments

•     High-Interest charges make you fall into a spiral of debt

The working of credit cards is generally easy, but you can always ask questions directly from your card issuer. Additionally, after knowing these important things about Credit Cards, you are now well aware if you are suited for one or not. Best of luck with making an important decision related to personal finance!

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