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A Simple Guide To Understand How Credit Cards Work

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Credit cards allow their owners to charge goods or services in advance and then recoup the money later with interest. Credit cards generally possess the attribute of revolving credit, whereby the credit limit is revised upon completing past debt repayments. See how do credit cards work in this article. 

Purchasing on credit is possible with credit cards issued by financial institutions. A credit card works like a first use, then pay later arrangement. Customers of banks with credit cards can purchase goods on credit and receive regular statements detailing their transactions with the bank. 

Paying the bill present in the statement is the responsibility of the customer. No interest will be charged if the customer makes the full payment within the stipulated period. Therefore, a credit card can be used for around 50 days without incurring interest.

There are two main credit card categories:

Unsecured and Secured.

A Secured credit card can be utilized if you don’t have an established credit history or a low credit score (CIBIL). Before issuing the credit card, the issuer takes collateral from you. Usually, it is refundable and used to protect you if you do not pay off your credit card debt.

You may want to get a secured credit card if you have a poor credit score and would like to improve it. The collateral you need for the secured credit card is provided when you apply. Once you establish a good credit score, your secured card can be converted into an unsecured card.

What kind of credit cards are available?

Rewards credit cards:

Cardholders who purchase with credit cards earn reward points on this credit card. As a reward, sometimes you are given a discount, sometimes you are given cashback, and sometimes you are given vouchers. Credit card deals may be available for booking hotel rooms, booking flights, ordering food online, etc.

Low-interest credit cards:

A low-interest credit card is the best option if you have a low income and want a credit card. Credit cards allow you to make purchases and payback with low-interest rates. Due to the low-interest rate, you can pay them back easily.

Balance transfer credit cards:

This will result in you receiving new credit cards to move your debt and giving you ample time to repay all your loans with interest. However, a penalty may be charged to you.

How do credit cards work?

Cards are the instruments that enable you to pay for anything online or offline using credit. The merchant bank gets the card details from you, and then the bank gets authorization from the credit card network to complete your transaction. Card issuers verify your information and approve or decline your transaction based on that information.

Your credit limit is debited after your transaction has been approved. Your card issuer will send you a statement and the bill for such transactions at the end of each month. 

The due date printed on your statement is the date from which you have a grace period to pay back your credit card bill. No interest will be charged if you successfully pay your bill during this period. However, penalties and interest may be assessed if you do not pay.

Is there anything I should look for in a credit card?

Depending on how the credit card will be used, the answer varies. The best card to get is a lifetime free credit card. Try to choose a credit card that offers rewards you will enjoy (cashback, airline miles, etc.) if you pay the balance in full each month. In our opinion, cashback is the most straightforward reward.

Always go for cards that have a lower interest rate and minimum fees if you will keep a balance on them from month to month. The interest and fees are greater than the rewards if you carry a balance, so the interest rate becomes increasingly important.