Everything about credit cards
What is a credit card?
A credit card is a card that is used for payments. It is given to clients of a financial institution like a bank, to enable the cardholder client to pay for products, all sorts of goods and even services. The concept of a credit card is based on the credit card holder's promise to pay back the financial institution for the full amount plus any agreed charges on the transaction. The card is made of plastic with the name of the holder and credit card number. The card also has an electronic component that allows the user to withdraw money from an Electronic Teller Machine (ATM). The card can also have other functions like buying and paying online through the internet.
How does a credit card work?
Credit cards have limits. The card holder can only spend the maximum amount that has been pre-set by the bank. It is in the interest of the cardholder to ensure that the limited amount is not to high so that paying it back would be easily achievable.
Available credit is the amount that you can still use on your credit card. Every time you use your credit card the available credit will become less until you have no credit left. After you paid your monthly credit card bill, the amount will increase again.
The credit card will get a balance when you use it. The outstanding amount on your credit card is called a credit balance. The credit balance is the amount you owe to the bank. This amount is not static and it will grow with added interest if it is not paid at the right time.
The bank will give you a statement with a due date to pay back your credit card debt. You have a limited time to pay the monthly credit card bill (it is called a bill cycle). The bank will set the time frame wherein credit card holder has to pay the monthly credit card bill. If the card holder does not pay within this time frame then the back will add accrued interest and the outstanding amount will increase.
Fees banks charge for credit cards.
Accrued interest.
This is interest that has accumulated when the card holder did not pay the minimum monthly payments on the outstanding credit card debt.
Annual Percentage Rate. (APR)
The credit card holder should negotiate with the bank for the lowest possible APR. The annual percentage rate is payable if the credit card holder does not pay the outstanding balance on the credit card within 30 days after making the purchase or paying for a service.
When you pay off the full (total) outstanding balance on the credit card each month you won’t have to pay any interest and then the APR won’t affect you in any way.
Annual fees.
Banks usually charge the client an annual fee for the privilege to have a credit card. Banks have different annual fees and some banks have very high fees that are connected to the status and financial standing of the client. Clients should negotiate for the lowest possible fees.
Cash advance fees.
When the card holder uses the credit card for cash the bank will usually charge very high cash advance fees. This is because the credit card was not given to be used for cash withdrawal but for buying by card or paying for expenses by card.
Late payment fees.
When clients are late with the minimum payments, they pay more than they will pay if they pay within the timeframe on the balance statement. The card holder should always be aware of the due date on the statement.
Balance transfer fees.
When you transfer money from one account to another, you might have to pay some fees. At some banks you can also sometimes transfer the balance on your credit card to another credit card. Please ensure that you discuss this with your bank.
International transaction fees.
Every credit card account is different and sometimes you will have to pay extra if you buy something in another country. Discuss with your bank to get the best card for the lowest fee.
Different categories of credit cards.
Petrol cards.
Many banks issue petrol cards that can be used to buy petrol, gas, car oil and also pay for car services. These cards are usually linked to main card accounts but they might have a different payback plan.
Credit cards with security.
These are cards that have a limit that is equal to an amount that was paid into the bank by the cardholder and that is kept at the bank as security.
Charge credit cards.
These cards must be paid in full by the due date and there is no carryover of debt to the next month. Charge credit cards also have limits that must be fully paid back within a short timeframe.
Different cards for different people.
Keep in mind that banks evaluate their client’s financial positions all the time. Customers with high incomes get better credit facilities with lower interest rates than customers with lower incomes. The banks often view high income earners as less risk than lower income earners. A good credit record might help to get a lower interest rate for a credit card at a bank. It is a good habit to pay back more than the minimum amount stipulated on the credit card statement.
Reasons why people get credit cards.
People like to have extra money available for security. Some see the credit card as a form of security in case of a small crisis that might demand sudden cash or payments. Credit cards are often needed when buying something online when you don’t have money in your currant or savings accounts. Credit cards can be a free loan if you can pay it back over a few days. If you manage your credit card well it can help you to build up a positive credit record.
Credit cards can be of benefit when you travel. Sometimes you can get free insurance when you travel. Some shopping centers have agreements with certain banks that the customer might get a very low interest rate when buying something on the credit card.
How many credit cards should people have?
It all depends on your financial situation and what you can afford. There should be a very good reason for having more than one card. The more cards you have the greater the risk for financial debt and also for credit card theft. Having more than one card should be exceptional rather than the norm.
Credit cards from credit unions.
Credit unions are non-profit organizations that let members loan money for low interest rates. They use pooled money for this. Compare their interest rates to that of banks and also see if their service fees are lower. Just like banks, credit unions will also do credit checks on those who apply for credit cards. Just like banks they will report your credit history and monthly payments to credit bureaus. If you have a good record with credit unions and pay your payments on time it can help you to improve your credit rating. It is always beneficial to keep your accounts in good standing at all financial institutions.
Credit cards for those with a bad credit records.
Usually the best advice for a bad credit record is to face the banks in a calm and relaxed way and to try and get some advice. Even people with the worst possible credit records can be rehabilitated into having a good record after some time. In the U.S.A there is an interesting option. The Savings Secured Visa Platinum Card from the State Department Federal Credit Union (SDFCU) is a credit card that is secured. It charges nearly no fees and has a low annual percentage rate (APR). It also has a very modest rewards system that rewards spending on a daily basis.
How to handle credit card debts.
When people are engulfed by debt it feels impossible to get a good credit record again. If the situation is severe it might be a good thing to go for credit counseling. If possible, ask around and see online what the benefits of credit counseling are and who you can approach in your area. If you do some reading about credit counseling online it might give you some insight on how the counseling companies work. You have to be careful to see if you will be affected negatively by their actions. So, keep an open mind when you approach credit counseling companies.
There are some things that some people do to get out of credit card debt. They suggest that it is best to start paying off one debt and then move on to the next when the first one is payed off. If possible, it might be good to try to make two or three payments per month. This might not be possible if you don’t have a job. Just remember that the majority of the people in the world is currently in serious financial trouble and that you are not alone.
Credit cards and the law.
When you use credit cards, you have a legal obligation to pay your debt. If you don’t pay your credit cards bills you can be blacklisted with credit unions and even taken to court. Banks can take legal action against defaulters and take position of some of the defaulters’ property. Be careful to use your credit card and don’t believe all promises made by banks, they want their moneyback and you are going to pay a lot of interest when you use credit cards.
Credit card fraud.
Immediately report the loss or theft of credit cards to the police and to the bank. Be careful with friends and family members who might have access to your credit card. Never allow anyone to take photos of your credit card. If your child, parent of sibling uses your credit card without your permission it is a criminal act that is punishable by law. That family member can end up in jail.
Word of advice.
Take credit cards seriously from the beginning. Try to get the best credit card with the lowest interest. Use your credit card in a very responsible way.