How Do Credit Cards Work

How Do Credit Cards Work?

This thin piece of plastic holds a great amount of power in your life. For those that have been living under a rock, a credit card is issued by a bank or a financial institution and allows customers to “borrow” funds. 

Banks that offer credit cards make sure to set borrowing limits based on the cardholder’s credit rating. Part of actually making sure to get one from a bank is to obtain a good credit score. 

This can be done by consulting experts, such as financial advisors, planners, and accountants. Once you get an acceptable score, you can try and apply to the establishment of your choice and finally get that flimsy rectangle that you desire! 

What is a credit card for? *

Credit cards are mostly used as a loaning tool of sorts. Banks offer cardholders the right to use them as payment for various items, such as appliances or electronics ( row 374 – electronics Dubai).

Other things customers can use credit cards for include paying for costly services such as travel expenses or a fancy meal

This is because banks allow individuals to pay the cost of those items at a later time, either as a single payment or via installments. This grants people the ability to loosely choose a payment scheme that works best for them. 

Common credit card types *

Part of understanding how these small pieces of technology work is by learning the different kinds that exist. There are various types of credit cards available and that might come as a surprise to some people.

The first kind is called an unsecured credit card. This is the most common type available. 

How it works is that an institution that offers said card does not require a potential cardholder to provide any deposit as collateral. The credit limit for this one is determined by the client’s own credit limit. 

The next variation is the rewards credit card. Banks that give this card offer cash back, points, travel miles, or some sort of free item for every coin the cardholder will spend. 

This reward system then encourages clients to use their cards more. 

The third type is a standard credit card. Also called a “plain-vanilla” credit card, cardholders get to only use it as a standard borrowing mechanism. 

No rewards or other complicated rules are included in this credit card type. 

Following the previous type are student credit cards, which are designed for young adults with little or no credit history. True to its name, they are catered for college students, who are mostly first-time applicants. 

The last type available is a prepaid debit card. Now, this one kind of serves like an electronic payment platform, as it usually matches the amount inside one’s linked account. 

How this card works is that a cardholder is only allowed to make purchases that instantly deduct the amount that they have linked to said item. 

So, how do they work? *

If all these cards provide benefits to customers by using the bank to pay their expenses in advance, what does the bank gain from credit cards? 

Well, it all comes down to the annual percentage rate (APR). The APR is a yearly interest that is charged to borrowers. In this case, the cardholders, by the bank or financial institutions they have a card in. 

Think of it as an additional charge that increases the more you loan or use your credit card. The APR can also cover additional fees from a transaction. 

Banks start charging an APR after at least 21 days since purchase. It will then increase the longer you put off paying the amount of money you used in full. 

There are other ways for you to avoid getting charged with APR or any other forms of interest a bank can charge you. For example, you can try paying within a grace period. 

This is the time between the end of a billing cycle and the date when your payment is due. If you try to pay your balance in full during that time, there is a chance that you will not be charged interest. 

Some banks would actually allow you to pay the full amount you’ve borrowed with your credit card immediately without any interest. The interest usually comes in on people who opt for installment payment methods. 

We do recommend avoiding making minimum payments on your credit card bills. If possible try paying your dues in full at once to avoid raking in more interest. 

This means that you actually give more money to the bank compared to the original amount you’ve borrowed from them. 

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