As the name sounds ‘Credit’, definitely it is related to something borrowing. Actually credit card is a piece of card just like other financial cards issued by financial organizations, which lets you borrow money from a pre approved limit to pay for your transactions.
In Debit Card, while making transaction, the money is deducted from your bank account while making transaction from your Credit Card, it is deduced from your pre-approved limit which you have to pay later.
In one line it is ‘Spend now pay later card’
Working of credit Cards
Any financial Institution whether public or private which issue a credit card to an someone decide and install a pre-limit amount of funds in the card. This pre-limit amount is depends on the credit score and credit history of the Individual. More the credit score and better the history is, more the limit he/she gets.
Whenever card holder swipe the card or do online transactions for payments, the worth amount get deducted from the limit. User can do as much transactions as he wants until there is some balance score in his/her card.
Now this amount which you spend is a kind of borrowing which you have to repay equal amount within the certain given time. Once you pay it, the pre-assigned limit is again installed in your card which is ready to spend again. Not repaying on time cause you extra penalty.
Actually it is a type of quick loan where the issuer gives you a piece of card in place of real cash in your hand.
How Credit limit is calculated?
How much credit limit you get in your card depends on lots of factors like :-
- It depends on the company which issue the card. Different company offers you different limits.
- It depends on the type of card you have purchased
- It depends on your credit score. Credit company see various factors like your credit history, any fraud record etc. to calculate the credit score. More the score you have better the chance you get higher limit.
- Ability to repay. If you have a high salary permanent job, definitely you gonna get high credit limit.
Benefits of credit cards
Using credit cards gives you lots of perks that’s why it so popular in almost every country. Using credit cards for payments gives you these benefits :-
- If you want to buy something immediately, but you want to pay for it later at the end of the month, this is for you. It helps to meet immediate expenses. This is very beneficial specially for monthly salary holders.
- Using credit card is less risky than using a debit card. If you are a victim of any transaction fraud through credit card, the card issuer responsibly investigate and returns back your credits in the card. This is not in the case of debit card where money is directly deducted from your bank account.
- Using credit card for payment gives you lots of returns backs. Some company gives you cashback, some gives you discounts, some gives you rewards which you can use it for next transactions while some credit card company also give you free Insurance like travel Insurance.
Business Model of Credit Cards
It seems that the Credit Card company is not making good amount of money through their services as customers have to return the same amount of money as they have spend. But it is not the whole equation.
For using credit card facility, the user has to pay certain yearly charge for their cards. This amount is not big but vary company to company.
If you not pay your credit card bills at time, the card issuer charges late payment charge. This is a type of penalty which is generally high.
If you use your credit card to withdraw cash money from ATM, you have to give some extra money which is usually of 2-5%.
But you’d be surprised to know that a large portion of these credit card companies Income actually is a result of people’s stupidity. Many people don’t pay their credit card bills at the end of the month. Because of this companies charge a high interest on it. This interest rate cab be as high as 30% compounded annually.
Which Credit Card Company should you choose?
Although different credit card companies doesn’t differ too much in their working system and user ease and benefits. But you might consider these thing while choosing a credit card :-
- It is better to take credit card from your own bank rather from third party company. This will save your certain hidden charges.
- High level cards gives you higher reward and extra features like Insurance has generally higher fee. So if you do lots of transactions then you can go with the higher one. Otherwise you can go with medium level cards.
- You must consider the payments methods given in your card. Some payment networks like VISA and MasterCard is widely acceptable all around the world. But some like AmericanExpress, Diners Club are not equally accepted world wide.
Should you use a Credit Card?
The answer depends on you. If you make timely payments of credit card bills, then you can use it. On the other hand if you are not sure about your repayment time, definitely you should avoid.
Also, if you us credit cards to buy things you can’t afford assuming that you would arrange the money after some time for the credit card bills, must avoid it. You may fall in debt trap.
If you want to get credit card just for rewards and cashback after every payments, then first assume all the parameters. Are all the rewards and cash back you would get on your purchase be more than the credit card yearly processing and other fees.
Credit is is beneficial to those who get his/her salary at the end of the month and can easily pay credit card bills at that time. Those who do lots of purchases through cards can get lots of rewards and cashbacks which totally will become worth amount.