You may be very familiar with credit cards, perhaps you own one, or your parents do. Regardless of your familiarity, there are a few things we should be clear about credit cards before you get one or swipe in your next purchase.
How does a credit card work?
Credit cards are not “free money”, they are are tools that only allow you to pay for your purchases at a later date (hence: credit). As you swipe your credit card, or enter your card’s account number online, your bank is charged for whatever you purchased in the store or online. Banks credit the merchant accounts once sales slips are received. These charges are assembled and billed to you (the cardholder) at the end of each billing period. You, as the cardholder, can either pay the entire balance of their statement, or in monthly installments, a privilege for which you are charged with interest. Also, the bank determines a minimum amount of money you must pay with each statement, or else you will be charged with additional fees on top of interest.
What is the difference between a debit card and a credit card?
With your debit card, you can make purchases using the money withdrawn from your own bank account. So you have to have money first before you can make the purchase. With your debit card, however, you can make online purchases, which you cannot do with just cash at hand.
With your credit card, on the other hand, the merchant is paid not with your own money, but with the bank’s money. Each month, you (the cardholder) must repay they the bank spent for your purchases (hence: credit).
Who qualifies for a credit card?
If you are 18 years old or older and have a steady income already, you can qualify for a credit card. But if you do not have income yet, you will need a qualified co-signer for the bank to approve the card. Getting approved for a credit card is easier if you have a steady income, a good credit history, and does not have debt (or have a small amount of debt only).
Should I use credit cards?
Whether to use or not to use credit cards depends on your intended lifestyle. However, many believe that it is important to use credit cards nowadays.
For example, in order to get approved for a housing loan, or to get approved by a landlord to rent an apartment, you need to have a good credit history. You can use your credit card as a tool for financial leverage. In times of grave and unexpected emergencies, credit cards are a real lifesavers. Also, you can use the bank’s money for a short period of time to buy food for you family a couple of days before your paycheck arrives, or for gadgets you need for work (say you are a freelancer) but cannot buy at one-time purchase.
Also, you can accumulate credit rewards such as cash rebates, airline miles, and products like gift cards.
How do I pick the right credit card?
Different banks offer a variety of credit card types. You need to assess your needs and your spending habits before you choose your credit card.
There are generalist credit cards that matches all your needs, whether you are prioritizing earning cash back or flyer miles. There are credit cards good for travellers, or shopaholics.
Credit card without pre-determined spending limit? It might hurt your credit score
A credit card without a credit limit or an interest rate and requires you to pay in full every month is not a credit card. It is a charge card. Charge cards do not keep your spending in check the way the credit card does.
A charge card won’t figure into your credit utilization rate (the amount of credit you have available from your revolving credit card accounts). Remember that your credit utilization rate is a crucial ingredient to your credit score.
The balances on your charge card factor are factored in the total amount of debt you owe across all your accounts, and missing the opportunity to pay charges accumulate in your charge card will definitely damage your credit score!
What does “grace period” mean?
For installment loans, there are grace periods, or the period of time you have after the due date passes on your payment without being hit with a late fee or interest.
For credit cards, however, ‘grace period’ means a little bit different. Grace periods for credit cards due refer to how long you can pay your balance in full to avoid being hit with interest on the balance, and must always be received on the due date before 5 p.m. to avoid late penalties. After that due date, there is no window in which you can successfully avoid a fee.
Rewards categories may change without notice
You receive alerts from your bank when they change rewards categories from quarter to quarter, but may not notify you when they change rewards categories from year to year.
Certain stores enforce credit cards minimums
There are stores that only allow credit card use for a minimum amount. This banks charge merchants with swipe fees. Each time you swipe your card, a merchant is allowing you to pay the through credit, and as such, the banks charge a fee. If you are purchasing something miniscule, merchants might think that the swipe fee might not be worth your purchase.
What are the first steps to getting a credit card?
If you haven’t established a credit history, or is a new graduate and a neophyte of the labor force thinking of getting a credit card, you’ll need a couple of things to get a credit card.
Usually the requirements are: proof of income (say, latest income tax return, payslips), proof of billing, and identification.
If you have a steady income and a well-kept checking or savings account, you are a great candidate to apply for a credit card. You can either apply online, or visit a bank branch to talk to a representative who has the authority to get your application approved.
