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How do credit cards work?
Having a credit card gives you the ability to make purchases or pay bills by borrowing money from the credit card company and paying it back by a certain date. It’s just like having a short-term loan. You are given a set credit limit and interest rates apply if you don’t make your payments on time and in full. Your card may come with special rewards and benefits that you can redeem, such as airline tickets or even cash back.
Why is a credit card important?
A physical (and digital) credit card can offer plenty of conveniences. For one, it is safer than carrying cash, especially if you are making a large purchase or like to have funds available for emergencies. On top of that, some credit cards may come with purchase protection for a certain period of time covering against accidental damage, theft or if the item purchased becomes lost.
If you are travelling abroad, it will give you peace of mind that Visa and Mastercard are universally accepted. Although, you will incur foreign transaction fees if you use it with a different currency. It’s also a good form of protection in that you may have certain types of insurance coverage such as travel insurance, medical insurance or car rental insurance. Your cardholder agreement and insurance certificates will outline what type of coverage you have.
What are the risks of having a credit card?
Although there are many wonderful perks that come with owning a credit card, there are also pitfalls to avoid. If you don’t pay careful attention to the details, you could wind up getting into a mountain of debt.
If you miss a payment or don’t pay off your balance in full every month, you will be subject to paying high-interest fees (typically around 19.99%). This can snowball into a large amount of debt, quickly. Ultimately, missing payments can harm your credit score, which will impact how much you can borrow from lenders in the future (say, when you need to take out a mortgage or car loan). To prevent this from happening, it’s wise to have enough money in your bank account to pay for your purchases and avoid impulse spending.
What are the benefits of having a credit card?
Unlike debit cards, credit card transactions are reported to the credit bureaus—Equifax and TransUnion—that monitor consumers’ credit scores. This helps you to build your credit history and determine your credit score. Another difference is that when using a credit card, you will be given a grace period to pay back the money you borrowed, whereas, with a debit card the money is instantly taken from your bank account.
It’s not always easy to know where your money goes. Having a credit card gives you the ability to keep track of your spending. This way you can see at a glance where you spend your money. If you find that you may be spending too much money on food and entertainment, you can take measures to cut down spending in that category. Many credit cards have tools to track these things in their apps and on their websites.
You have probably noticed that during the pandemic, many businesses have become cashless. For this reason, your credit card provides a convenient way to pay for things instead of carrying cash and coins. Plus, who really wants to fumble around trying to get the exact change to give to the cashier?