How Credit Cards Work: A Simple Guide

Your credit card is the key to expanded buying power. Does it make you wonder how credit cards work? A credit allows you to spend without worrying about anyone questioning your creditworthiness or paying power. Your credit card itself represents that you do have a strong credit history.

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Typically, a credit card lets you borrow money from your bank with the promise to repay it back before or on the bill’s due date. If not, there are certain interest rates charged. The idea behind introducing credit cards was to give access to the buy now, pay later option. 

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This option is what differentiates credit cards from normal debit cards or cash, where you need to have money readily available to make any payment. 

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In addition to providing you with the ability to spend, credit cards also enable you to qualify for other financial services like loans, mortgages, etc. by building your credit score. Some of the monetary perks of credit cards include reward points, gift coupons, cashback, and discount facilities. 

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How do Credit Cards Work? 

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Credit cards, or more precisely, the rectangular pieces of metal or plastic that you use to swipe/tap/insert in a card reader during checkout, are a cashless form of transaction method. 

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When you get your credit card, you get your credit limit- beyond which any transaction in a particular month will be liable to additional fees and interest rates. 

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As soon as you make a transaction, the money doesn’t directly reach the merchant party, there is a certain procedure of verifying receipts with the bank. 

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For you, this balance will be shown as pending on your account, and after some days, it is posted to your account. This posted amount is what we typically name the total account balance- which you will have to pay on or before the due day, failing which charges you additional fees. 

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In order to make the repayment, you generally receive a bill/statement from the card issuer every month (typically on the same date). This bill contains all the transactions that you made during the billing cycle. 

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Even if you can’t pay the whole sum in one go, there are certain EMI facilities available, or you can even consider paying just the minimum sum for that month. However, this practice mustn’t be progressively prioritized. 

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Some cards even let you delay the payment by around 21 days from the end of the billing cycle. This period of no-interest is known as the grace period. 

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Pros of Owning a Credit Card

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1. Buy now, pay later:

Through your credit card, you can buy any item and pay for it later. In essence, the bill receipts from the merchants are deposited to the bank- from here, the merchant gets their money.

When you pay your monthly dues, that’s when the bank gets back its money. This is the simple yet slightly complicated procedure that occurs as soon as you swipe your credit card. 

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Read: What is Buy Now, Pay Later? Here’s everything you need to know about it.

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2. Widely accepted payment method:

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Credit cards are widely accepted forms of payment. Not just domestically, you can even carry your card to a foreign country and make transactions there too. 

However, you must inform your credit card company or bank before doing so. 

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3. Chance to improve your credit score:

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The first priority for anyone applying for a credit card is the certainty that it will help them improve their credit score. However, it is possible only if you are consistent with your payment of dues and make sure that the accumulated balance is low. 

Unless you preach these two things like your religion, your credit score won’t rise. 

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4. Monetary beauty of credit cards:

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Your credit card can help you save a lot of money. Most of them provide rewards points which you can use to earn amazing discounts or gift coupons. 

You can even replace these reward points options with cashback- this way, you will receive a certain amount as cashback for the transactions that you made. You can even use that to repay your dues! 

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Now that you know why you should own a credit card, let’s see how they actually work:

How do credit cards work? 

‍

Credit cards, or more precisely, the rectangular pieces of metal or plastic that you use to swipe/tap/insert in a card reader during checkout, are a cashless form of transaction method. 

‍

When you get your credit card, you get your credit limit- beyond which any transaction in a particular month will be liable to additional fees and interest rates. 

‍

As soon as you make a transaction, the money doesn’t directly reach the merchant party, there is a certain procedure of verifying receipts with the bank. 

‍

For you, this balance will be shown as pending on your account, and after some days, it is posted to your account. This posted amount is what we typically name the total account balance- which you will have to pay on or before the due day, failing which charges you additional fees. 

‍

In order to make the repayment, you generally receive a bill/statement from the card issuer every month (typically on the same date). This bill contains all the transactions that you made during the billing cycle. 

‍

Even if you can’t pay the whole sum in one go, there are certain EMI facilities available, or you can even consider paying just the minimum sum for that month. However, this practice mustn’t be progressively prioritized. 

‍

Some cards even let you delay the payment by around 21 days from the end of the billing cycle. This period of no-interest is known as the grace period. 

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Different types of credit cards for you to try on:

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0% APR Cards

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Some credit cards provide their owners with a period of ‘no-interest’ financing. It can vary from 15-18-12 or 21 months. During this period, any transaction that you carry out will not be liable for any interest rate charges. 

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However, for some additional benefits like balance transfers, your card issuer can charge a processing fee. Also, during this time, you can even avail of benefits like airport lounges, etc. 

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Rewards cards

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If you are interested in earning reward points, cashback, air miles, etc. on all your purchases, a reward card is the one for you. 

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For everything you buy, you’ll receive at least 1% or 1X cashback (in the best cases, 4X) on a variety of purchases, varying from groceries to travel. 

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Secured cards

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If you are a newbie in the credit card market and are overwhelmed with the available options, you must apply for a secured card. They work like any other normal unsecured credit card. 

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The only difference is that they ask you to deposit a minimum fee for the security (like a refund in case you lose your card) that they provide. Only after you make this deposit will you be able to access your line of credit. 

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Business cards

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If you are a business owner (especially new) then you can avail some amazing benefits of opening a credit card account. 

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On your typical initial business expenses like travel and shipping, you can receive some rewards. You will already be investing a lot in your business, so 0% APR cards are a lucrative option for you. 

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Credit cards are one of the easiest ways to carry out cashless transactions. However, they don't limit you there but go beyond and provide you with various rewards and additional benefits. 

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Remember, your credit card can even help you save a lot of money if you are able to use it wisely. Make timely payments of dues and keep the balance low. This way, you can avail all the benefits with no worry of debt- this pretty much explains why you certainly need one in your life!  

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Check out: 8 Things That Will Happen If You Don't Use Your Credit Card

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