How does a Credit Card Work

How does a Credit Card Work

The current society is slowly drifting from the use of cash to the use of plastic money. Many folks fill their wallets with several plastic cards to carry out the daily transactions. The cards include the debit and credit cards.

The process of acquiring a credit card is simple and cheap. Most folks are using the credit cards without understanding the inner workings of the credit card.

Below is a walk-through of how the credit works that you need to be well conversant with before you make an order for your card.

What Is A Credit Card?

A credit card is a special plastic card that allows you access to the credit limit set by your credit card issuer. The credit limit differs from one user to the other depending on the creditworthiness of an individual.

To get a credit card, you need the following qualifications.

Qualifying for a Credit Card

Any person above the age of 18 having a regular source of income is eligible for a credit card. You are likely to receive several invitations from the credit card companies in your mail and advertisements roaming around in the media.

Records of your previous credit transactions are likely to give you a higher credit limit. Always try to maintain a clean credit record. The company is likely to ask for the information of your guarantors. The guarantors should be preferably folks with clean credit records. A guarantor who is a client of the same credit card company is an added advantage to your application.

Making a Purchase using a Credit Card

When you use the credit card to make a purchase, several actions take place behind the scenes. The swiping of your card at the terminal prompts your credit card issuer on the validity of your card. The machine also confirms the available balance in your card.

Your credit card issuer immediately sends a reply to the swiping machine. The feedback from your credit card issuer indicates whether your transaction is approved or declined. You need to maintain a healthy credit card account balance to avoid embarrassing moments at the store.

Maintaining a Healthy Credit Card Account Balance

Anytime that you make a transaction, changes reflect in the balances of your credit card balance. When you swipe your card, you increase your credit card balance by the relevant amount. A credit card payment, on the other hand, lowers your balance.

You need to carefully monitor the history of your transactions using your credit card. The more you make transactions, the more your credit card limit elevates. Always try to make full payments within the stipulated time frame.

Use your credit card to make purchases responsibly, and you shall soon be enjoying an increased credit limit.

How to Make Payments for your Credit Card?

As we have stated above, increasing your credit score largely depends on how you make payments. Each month, you are required to make a minimum payment to maintain your card.

Your card issuer will send you the billing statement on the due date. The billing statement shows all your transactions and your minimum payment for the month.

Calculation of the minimum payment is based on your credit card balance. Usually, the amount is not constant to the different credit card issuers. The amount may differ from one credit card issuer to another.

What are the Interest Rates of a Credit Card?

When you use your credit card, the card issuer gives you a grace period of up to 30 days to make an interest free repayment. After the grace period is over, a fee based on your outstanding balance and interest rate is added to your accumulated balance.

The interest rates on the credit cards accumulated balances are based on your credit history, and market interest rates. Good credit history will attract lower interest rates. Timely clearance of the minimum payment will attract low-interest rates in the month that you delay payments.

Advantages of a Credit Card

  •         You can dispute transactions and withhold payment for services. A written application to the card issuer will set in motion wheels for an extensive investigation into your application. You cannot enjoy this privilege when you use a debit card.
  •         Using a credit card earns you reward points. The credit card issuers and merchants offer some redeemable reward points to credit card users. The accumulated reward points are likely to fetch a great prize if you are lucky enough.
  •         Stolen Credit Cards are not easily used. When you lose your credit card, make a report to your bank or credit card issuer. Whenever someone tries to make a purchase using your credit card, the transaction will be rejected, and your account remains safe.
  •         Credit Cards are Promoting Cashless Operations. When you are using a credit card, you do not need to carry bulk cash to the store. All you need is one card to make all your transactions.

The major disadvantage of using a credit card could be the charges that you need to pay to maintain the use of your card. Most people also try to stay away from the use of credit cards because the whole idea of how the credit card works is foreign.

Before you make an application for your credit card, it is important that you fully understand the workings of a credit card.

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