Introduction to the credit card

A basic introduction to the world of credit cards. If you’re a newbie, you’ll want to read this first.

 

While the expression cash is king still
rings true, many would agree that the next best thing to cash is a credit card.

What is a credit card?

A credit card is a method of payment which enables
the cardholder to purchase goods or services without paying cash upfront. It is
actually a type of unsecured loan where the cardholder can spend on purchases
using the card based on a credit limit set by the card issuer.

The good side

Practical
and convenient
– Having a credit card allows you to
buy almost anything even if you do not have enough cash on hand. As most cards
are widely accepted across the globe, shopping overseas with a credit card
would be a breeze.

Security
– Buying high-priced items with a credit card will
save you the trouble and danger of carrying huge amounts of cash with you when
you shop.

Emergency
cash –
A credit card usually comes with a cash
advance feature which allows cardholders to withdraw a certain amount of cash
from the card issuer. This is especially useful during unforeseen calamities such
as a medical emergency.

Savings
and privileges
– Nowadays, credit cards offer perks
including cash back, reward programs or special privileges such as discounts at
selective merchants. Cardholders can actually save money by using their credit
card wisely.

The bad side

Overspending – Since shopping with a credit card is so easy, one might be
tempted to swipe at every single opportunity. You could end up spending more
than you can afford.

Risk
of debt
– By paying a minimum amount and not
settling their full outstanding card balance or transferring their outstanding
card balance to other credit cards, cardholders could end up with a ton of debt
or potentially even face bankruptcy.

Interest
payments
– Interests will be charged on any outstanding
credit card balances after the interest-free period. Hence, cardholders who do
not settle their card balances on time will have to pay more for their
spending.

Fraud – Carrying a credit card might be safer than carrying wads of cash
around but this payment technology is still vulnerable to fraud. You might end
up with bills which you did not swipe for.

Credit card vs. Charge card

Some people might think that a charge card
is the same as a credit card because both cards enable cardholders to spend now
and pay later. In fact, there are two major differences:

Payment – A charge card requires the card balance to be paid in full each
month. Otherwise, late charges are incurred and card use may be restricted. A
credit card only requires a minimum payment and the balance can be carried
forward and interest is charged.

Credit
limit
– There is typically no spending limit on a
charge card while only a specific amount can be charged to a credit card.

Having a basic understanding of a credit
card is important before you actually sign up for it to avoid any possible
future complications.

 

 

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