There is no arguing the convenience of a credit card. We have all felt the pressure of shuffling through a wad of cash for the right bill, and a pocket full of jingling coins is both vexing and cumbersome.
Cash is simply a chore to carry around, which is why the invention of the credit card was such a game-changer. This slim piece of plastic offers incredible purchasing power with the simple convenience of a single card.
In this time of global crisis, credit cards have become a lifeline for the many unemployed Americans struggling to make ends meet. Before you apply for a new credit card, this is what you need to know about the benefits of credit cards and how they work.
What is a Credit Card?
Don’t mistake the credit card for a debit card, however. There are many differences between a credit card and debit card, including how much you can spend and what it will cost you. A credit card is similar to a loan because you pay back those funds at a later time. A debit card, on the other hand, immediately draws from your checking account, so funds are paid without any delay.
A credit card allows you to make electronic payments for your purchases, but that doesn’t mean that it gives you free money. While payment is not due right away, you’re still obligated to pay at least the minimum balance due. If you don’t pay your balance in-full within the grace period, you’re charged interest – thus making your purchase more expensive.
It usually takes a credit card company up to thirty days to bill you for your monthly purchases, so paying by credit card can be especially convenient when you need a little more time to come up with the cash to pay for something.
How a Credit Card Works
When you are approved for a credit card, the card issuer will approve you for a specific amount. You can use this as revolving credit, so as you pay off your credit card, that credit becomes available to you again.
Credit card companies make their money through the interest they charge on your purchases. If you pay your balances during the grace period, you can skip the fees and simply repay what you spend.
If you make a payment after the grace period, this is where interest can seriously cost you. Card issuers make a fortune from things like late payment fees, over-limit fees and transfer fees – so be sure to carefully review the terms of your cardholder agreement.
What are the Benefits of a Credit Card?
There are many different types of credit cards you can choose from, depending on your credit history and how you plan to use your card.
Types of Credit Cards
Credit cards don’t just buy you time. There are many perks that can accompany a credit card, depending on which one you choose.
- Traditional credit cards
The standard credit card gives you a set amount that you can spend with interest rates that vary depending on your credit history and credit score.
- Rewards cards
These cards come with some sort of extra incentive for using them. Cash back credit cards or travel credit cards come with rewards that can earn you airline points or a free stay at certain hotels and food delivery. Some rewards cards offer double points on certain everyday purchases, like groceries, gas and even your utilities.
- Premium rewards cards
This is like the upgraded version of a rewards card, offering even better upgrades for those who spend more money. This could be everything from upgraded hotel rooms to free tickets and built-in travel insurance.
- Balance transfer cards
A balance transfer credit card is a popular option when you want to consolidate credit card debt into just one card with one monthly bill. You can benefit from lower interest and sometimes even travel rewards, but you’ll need good credit to qualify.
- Low-interest cards
These are like balance-transfer cards, but they also leverage lower interest rates to save you more money. You will need excellent credit to qualify, but if you can, you can save a ton of money with a low-interest credit card or a no interest credit card.
These are store credit cards, like a Macy’s credit card or a credit card from Best Buy. Stores generally offer you these cards at the register with extra incentives to save on your purchase, but you could also face significantly higher interest rates.
- Gas cards
Similar to store cards, there are many gas cards that can offer you extra savings at the pump. However, these cards can be limited to specific gas chains, which means that you will only receive your discounts if you use the same chain every time.
- Secured cards
A secured credit card is an excellent option for those who want to rebuild their credit. Instead of relying solely upon your credit score, this card is guaranteed by cash or some other asset.
Pros and Cons of a Credit Card
There are both pros and cons to using a credit card.
How do I choose a credit card?
Before you sign up for a new credit card, you should give careful consideration to the terms of your card, including things like these.
- Card type
Different credit cards are processed using different payment networks, such as Visa, MasterCard and Discover. Some credit card types, like American Express, are not accepted as widely as Visa or MasterCard, so consider how much accessibility you will need for your card.
- Interest rate
The credit card company will charge you a percentage of your balance until your total debts are repaid. This can vary significantly based on the card issuer and your credit history, so be sure to shop around for the best low-interest credit card.
There are many credit card fees that you can be charged, including annual fees, late payment fees, finance charges, over-the-limit fees and balance transfer fees. Carefully review your cardholder agreement to see what hidden fees may accompany your credit card.
Rewards cards are specialized credit cards that offer special rewards based on how much you spend. You can accumulate points that can be used toward a number of extras, like airline miles and travel upgrades.
With careful, responsible use, a credit card can be the extra lifeline you need when money is short or when you want to be rewarded for the things you buy the most. A credit card can also be very rewarding, giving you all kinds of luxurious upgrades and bonuses that are fun to use. However, nothing with a credit card comes free, so it’s important that you never spend more than you can repay.