An Introduction to Credit Cards

Within the last couple of decades the word ‘plastic’ has invaded our financial lives. These days it seems that it is incredibly difficult to survive without having to hand your credit card over a counter or punch its number into a form online. For this reason, it is important to understand what credit cards are and how they work.

What Is a Credit Card?

Try not to get confused between credit cards, debit cards and charge cards. A credit card will allow a user to purchase goods and services based on the promise that they will pay for them later. The credit card issuer will allow the user to have ‘credit’, which is a form of cash advance, and any of this credit that is spent must be paid back later with interest charged to it (the percentage increase in value of the borrowed amount). Rather than have to pay back the full amount at the end of each month (such as with a charge card), the user can hold off their payments until later.

Interest Rates

If you are thinking of getting a credit card, you need to start looking at the different interest rates. This is how much it is going to cost you to borrow, and there will be a variety of rates and terms on the market.

You will be charged interest on your outstanding balance every month, and this usually ranges between 0.75% and 1.5%, meaning that a borrowed amount will be 9-18% greater in value after a year. Do not take this as gospel; there are cheaper and more expensive cards than this out there.
Some credit card issuers will offer you very low or even zero interest rates for an introductory period of 6 to 12 months. Do not be fooled by any of these ‘offers’, when choosing your most suitable package you must try to find a balance between the benefits that come with the credit card (such as discounts and air-miles) and the interest rates. You will never find a credit card with all the benefits you want as well as extremely low rates.

Is a Credit Card Right For Me?

If you are the sort of person who is not able to pay off their debts each month, you would benefit from being able to purchase on credit. However, try to be honest about your spending habits. If you are likely to see your credit limit and take it as a challenge, you are just going to get yourself into a lot of debt. Also, if you prefer to pay by cash, be aware that there are bank charges for cash withdrawals – it may be cheaper for you to use a charge card.