What is a Credit Card?
What is a credit card is one of the most frequently asked questions on google. Yet, the explanations and interpretations often complicated to understand. This article explains what is a credit card, how do credit cards work, how to get a credit card, how to pay-off credit card debt and also we will see whether a credit card is good or bad.
The concept of ‘credit card’ ruling the life of many across the world due to its unique nature and the bundle of benefits. The credit card is one of the innovative financial products offered by banks and financial institutions. Ask salaried people and businessmen, I am sure many of them are using a credit card for shopping, making payment of utilities, and using it for many personal emergencies. You would also find people who are misusing their credit cards, resulting in a bad impression on the credit card products. That is the reason, I always call the credit card a double-edged sword which hurts if not handled appropriately with due care.
A credit card is a rectangular shaped thin card made of plastic and metal issued by a bank or financial institution. The credit card enables users to obtain funds and make purchases and payments according to the pre-approved limits. The banks determine the credit card limit based on several factors including income, occupation, size of income, spending pattern, credit score, geographical location, etc. The credit card comprises the full name of the cardholder, fourteen digit card number, validity beginning date, expiry date, issuing bank name, logo, card networks, three-digit CVV number, electromagnetic strip, and the address of the bank or issuing financial institution. The recent cards come with a chip that reads the transaction without even swiping the card.
How do Credit Cards Work?
When you purchase any item in a brick and mortar-based shop, you would require to share your card with the shopkeeper who swipes your card followed by entering your pin to complete the transaction for an amount. When you make a payment for your purchases, the credit card company (generally the banks) will make a payment towards your purchases on behalf of you. The retailer takes the payment and completes the transactions. In simple terms, when you make purchases, the bank enters a contractual obligation with the retailer to pay your expenses, relieving you from making an immediate payment. The bank pays your purchase expenses to the shop and later you pay your bank along with interest charges. Please remember when you pay credit card dues within the specified duration, the bank would not charge you any interest amount.
When you exceed your permissible limit and make shopping, the bank would deny payment of your shopping expenses resulting in a ‘transaction declined’.Error note on shopkeeper swiping machine will appear. There are several reasons when your transaction gets declined. For example:
- Poor network on swiping machine
- Insufficient funds account
- Inappropriate swiping of the card
- Incorrect pin
- Swiping expired card
Generally, when you swipe your card for making payment for purchases, the retailer credit card terminal requests your bank to confirm the validity of your card and available credit limit. Then your bank sends a back massage to your retailer whether the transaction is possible or not. Based on the message, the retailer card terminal generates approval or a declined message.
I will give a simple example to make you understand how credit cards work. Every time you shop, your available credit goes down by that amount. Let us assume that you have an INR 30,000 credit limit and you make an INR 25,000 purchase, you’ll have INR 5,000 in available credit. You will owe INR 25000 to the credit card company. If you borrow another INR 2000 before paying back the INR 25000 you borrowed, your total dues to your credit card company will be INR 27000 and have INR 3000 in available credit.
How to Pay Off Credit Card Debt?
Generally, credit cards change your thought process and disable you from differentiating your needs and wants, essentials and luxuries, present, and future requirements. This is the fundamental reason why many credit card users get into the financial disaster.
Though the term debt is just a four-letter word, yet, when it goes out of your control it may cost your physical and emotional health. Many credit card users feel that the approved credit card limit is an excess income and it tempts them to shop in excess resulting in a huge debt. Even though credit card options rescue individuals in emergencies and critical times, it may become a disaster if not managed properly. Here are a few tips for managing your credit card bills especially to pay off credit card debt.
- Freeze your credit card usage
Freezing the consumption of your credit limit helps you limit the debt level. Once you freeze the usage of the credit limit, you can plan your financials accordingly, shop within the credit limit, and not make gullible financial decisions.
- Liquidate your investments and clear the obligations
When you have credit card debt, then there is no point in holding any long-term investments since you have been affected in multiple ways. For example, your credit debt interest payable is more than the amount you earn from your investments which makes your investments useless. For example, when you are paying 19% interest on your credit cards, then there is no point in holding investments that yield a 9% return. Therefore, better you can liquidate your investments to reduce your interest burden on credit card dues.
- Balance transfer option
Balance transfer options enable you to transfer your credit card outstanding amounts into lower-cost EMI payments. By using a balance transfer option, you can reduce your interest burden while taking efficient steps to pay off credit card debt.
- Snowball method
The Snowball method enables you to pay off the credit card debt one after another. This helps them to align debt payments instead of taking every burden at a time. You can start paying the smallest dues and oldest dues first. Targeting one debt at a time helps you retain focus on clearing your financial obligations else you simply end up paying interest on all the debts for years. Remember, the interest payment will never help you come out of your debts. Only when you focus on paying the principal amounts, it is possible to come out of the debt trap.
- Pay more than your minimum due
Generally, credit card users prefer to pay the minimum due instead of making full payment of the outstanding. They may be doing this for multiple reasons. I’m not saying minimum due payment is wrong. What I’m saying is just making payment a little more than the payment of minimum due. Because this brings a couple of advantages. For example, paying more than the minimum due would reduce your debt burden while helping you to earn a better credit score. This will keep you moving in the direction of clearing the debt. You can also avoid charges that would be imposed if you pay the only minimum due. Further, minimum due payment will gradually increase your debt liability in exponential format.
How to Get a Credit Card?
Having a credit card is no more a luxury., It just brings you a lot of conveniences, cashback, discounts, offers, interest-free EMIs, etc. Basically, it helps you spend before you even earn the money! So, if you are interested in getting a credit card let me help you have smooth sailing through the process. Read on.
- Consider your needs
You need to purchase a credit card based on your requirements and usage. For example, if you just use your credit card to fill fuel, then go for cards that are designed specifically for fuel expense payments. The same logic holds with shopping, overdraft, utility payments, and other payments. Each of these benefits comes with their charges so you need to be careful while establishing your needs for a credit card.
- Choose the bank or credit card company
Choose your credit card company based on their track records in offering benefits and their collection speed. If the bank is too aggressive about payment collections, charge high-interest rates on a credit card, then better you avoid them.
- Apply for the card
To apply for a credit card, either visit the bank or connect with credit card agencies who help you obtain a credit card from the bank of your choice. The credit card company check the following aspects before issuing you the card
- Income per year
- Consistency in cash flow
- Nature of job
- Geographical region
- Credit score
- Spending pattern
- Shopping pattern
Is Credit Card Good or Bad?
Is credit card good or bad?
Well! everyone who uses credit card has their own opinion about these questions based on their belief and own experiences. A credit card comes with a range of benefits which makes it attractive and useful to people. A credit card helps you pay off your expenses, utilities, shopping payments, and other payments. It also helps you withdraw cash during critical conditions when you have no money with you. However, the very nature of credit cards tempts the user to consume the limit aggressively which may lead to financial crisis.
Credit cards are the best options to earn rewards, discounts, etc. in many shopping outlets that offer discounts on certain credit cards. Clearly, having a credit card is beneficial. But, overspending on credit cards, making careless purchases, shopping even when there is no need can damage your financial health.
Hope you got to know about What is a credit card, how it work and many more details about it. Share your comments and thoughts in the below in comments section
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