A credit card is a payment card issued to users (cardholders) as a method of payment. It allows the cardholder to pay for goods and services based on the holder’s promise to pay for them. The issuer of the card (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.
A credit card is often misunderstood as the cash available for spending instead of short term loan or in some cases life-time debt. The worst thing to use the credit card is to fill the gap between your expenses and income each month. Anyone who has certain income level and ability to pay bills on time can avail a credit card. The bank determines the credit limit up to which we can avail and with our ongoing usage, limits would be increased. (Encourages to get into deeper debt). With continuous usage, we may also qualify for premium cards.
Before getting into the types of credit card circulated, here are few interesting information.
- The first two digit on your credit card identification number identifies the type of industry that issued the card.
- Just a 1% credit card interest rate increase in 2015 would cost Americans $7.6 billion a year.
- Minimum credit card payments are low because it encourages people to go for higher debt.
- According to UK Credit Card Association, £15.5 billion has been spent using the credit card (Nov’15). The annual growth rate of spending is 7.1% and in increasing trend.
- As of 2015, the average amount of credit card debt carried by the average US person was $5,746.92. Millions of cardholders carry a dangerous amount of card debt.
Back to the most common types of credit card,
Standard credit card: These are general purpose credit cards which are issued upon paying a commitment fee. Anyone who is over 18 years and meets the minimum criteria established by the bank can obtain the card. Limit is fixed by the issuing authority.
Reward card: These cards come with some reward programs.(Again encouraged to become spendthrift). The points get accumulated over time which can be traded off with certain perks like hotel stays, merchandise, air travel car rentals, discounts etc., Nevertheless, they come with many rules and restrictions attached to it. Typically suitable for people who pay off their balances every month.
Secured credit cards: It is used to re-establish the credit history. The card can be availed by depositing a certain percentage of the total amount of credit desired. This determines the credit limit. Say, if I deposit $1000, I may get a credit card with the limit of $500-$1000. It is typically for people with negative or no credit history. Fees and service charges are higher than other cards.
Specialty credit cards: These are offered through affiliations, partnerships, major brand retailers or service providers. Many specialty credit cards share a partnership between organizations that support a social cause, professional organization or an alumni association. A small portion of the purchase goes toward the intended organization. Some companies may issue even their own specialty card which offers a discount on their products in particular. Eg: Airline companies may offer their own specialty credit card wherein we can earn air miles depending on how much is spent using the card.
There are also other cards like premium cards which are “gold” and “ platinum” cards which are generally referred as “upscale”. They can be availed either by invitation only or with excellent credit, having huge salaries and by heavy spenders and travellers.
It has to be remembered, the more the credit cards, the more we spend. We should count on our usage and necessity to make our choice. However, many credit card companies apprehend that people do not use this best judgement. Most companies provide the consumer with the interest-free loan for certain periods. Nonetheless, it cannot be availed if you have already taken a cash advance, which is the most expensive way of accessing credit.
Another tricky way is to whether to choose for balance transfer. A balance transfer is transferring your credit card balance (having higher interest rate) to another credit company (typically with a lower interest rate) at 0% charged on the amount. Though it may sound appealing, careful consideration should be given especially if you are transferring to credit card which already has a balance. Further, it does not mean in any way that you are repaying off your debt, rather, you are jumping from one debt to another. The only real, solid benefit from a balance transfer is money can be saved over the long haul if the previously owed amount is paid at a lower interest rate, including all the costs.
“Late payments hurt your credit score and never, ever take cash advance on your credit card”
Now comes the excess baggage which comes along with the credit card, the interest portion. Average credit card interest is 17% to 20%. Yes, it is high and we seldom ignore the additional loan part associated with it. Interest also referred as “Annual Percentage Rate” (APR) describes the interest rate for the whole year rather than monthly rate/fee. To put it another way, it is the annual rate charged for borrowing, expressed as a single percentage number. This rate varies from person to person and from card to card depending on factors such as credit scores.
Eg: Credit card has an APR of 15 percent. Let’s convert it to daily rate (15/365) which is 0.04109. Assume cardholder has $1000 balance at this rate. The next day, interest is added and the balance becomes $1000.4, plus any purchases minus any payments made. This process occurs each day until the completion of the cycle. So by the end of the first month, $1000 will become $1013 when interest charges are applied at 15% APR.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
Take for example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarised on the back of the monthly statement
This is definitely not a pleasant thought. With this in mind, make sure to understand how much interest is charged and how it is actually calculated.
According to Financial advisors, an average person should not be paying more than 10% of the net take home pay on credit card and other consumer debt. Here are few prompts to help you overcome credit card debt:
- Categorise the debt (high interest and low interest)
- Pay off the debt on the card which has the highest interest rate.
- Pay off your debt whenever you could to eliminate the balances.
- Track your expenses
- Avoiding new debts which will pile on the existing ones, by which I mean, put away your credit card for a month.
By following these, you could see a change in your debt level within a month. You shall witness a reduction in the frequency of your visits to those expensive restaurants and luxury purchases which you would have avoided but for the credit card.This is one of the smart ways to manage our personal finance
With the growing usage, also comes the exposure to credit card frauds. Hackers may try to attach skimming devices to the exterior of an ATM or Point of Sales terminals requiring a pin. Refer the chart representing the percentage of cardholders affected by fraud in few of the countries.
Give a second glance before we swipe for a purchase.
Hope this article would help you guys out there to be cautious with your credit card usage.
“Saving money starts by removing all possible debts”
