To most people, a credit card is just a tool that helps them make certain purchases but it could be much more. When you use it responsibly, you can use it to build a great credit history and this will allow you to get better loans in the future. People with good credit scores typically get cheaper insurance, favourable interest rates and lower mortgage rates.
What is a credit card?
Credit cards work just like debit cards. The only difference is that the funds are not taken from your checking account when you make a financial transaction. Essentially, credit cards are like short term loans. Depending on the lender and payment methods, the loan will accrue different interest rates.
Why you need a credit card
Credit cards have multiple benefits; the most important one is that they help you build a great credit report. Good credit reports are very beneficial financially; they help get easy access to loans at favourable interest rates. With a good credit report, you can get approval for a car loan or apartment easily. They give you rewards like zero utility deposits, low insurance premium and travel rewards.
Secured vs unsecured credit cards
Secured credit cards are the simplest to obtain. They are backed up with a cash deposit that is equal to the credit card limit. The deposit is supposed to act as collateral and reduces the risks of late or no payments for the lender. They are great options for people who have zero credit card history. Unsecured credit cards do not run on a deposit.
You make the payments as you would on the secured credit cards and pay off the interest if you do not clear the full balance. Unsecured cards are not backed up by any form of collateral. The credit limit is chosen depending n your income and credit history. To lenders, unsecured cards are more risky than the secured ones.
The grace period
The best thing about credit cards is that you get interest free loan for the first three to four weeks. This means that any purchase you make within that period is interest free. If you do not make the payment on the full amount within that period, the interest rates will be calculated daily.
Credit cards and credit scores
Credit cards can affect your credit score in multiple ways. It can either affect the score positively or negatively. For a positive effect, the most important factor is the payment history; you have to make the payments on time to get a positive result on your credit card. A late payment is reported within a couple of days and this creates a negative effect on your credit card score. If you apply for a new credit, it has a negative effect on your credit score. To avoid this, you have to avoid applying for several cards and focus on building a long term credit.
The final word
Having a credit card is not easy; there are multiple credit fees you will have to pay. Some can e easily avoided while others can’t. They include balance transfer late payment, annual fee, foreign transaction and over the limit fees.