Understanding how credit cards operate in a world where demand for them is always growing can help you avoid running up too much debt. Credit card benefits and downsides have long been a topic of discussion. We are here to educate you on how credit cards work and how to use them so you can decide if using a credit card is something you should think about.
What is a credit card?
- A bank will offer you a credit card, which you may use to pay bills and get cash from an ATM. You can do so using the credit limit assigned to you. This implies that you can continue to proceed with the payment even if you don’t have the desired amount in your account at a given time.
- The credit limit assigned to you is monthly. The limit is determined by your source of income, previous repayment history, and your current loans or debts. On using your credit limit in a given month you are obligated to pay the bill in the preceding month.
- Bank or issuing authority can revise credit limits based on income and repayment fluctuations. This indeed is the basic meaning and functioning of a credit card.
Types of Credit cards
Everybody utilizes it differently. Some want to use it for shopping and vacation, while some want to use it in an emergency. We’ve looked at the fundamentals of what a credit card is and how it works. However, banks and other commercial organizations now provide a variety of credit cards. Each has a distinct function so you can choose the right one for your usage. We shall look at some of these card types.
Travel
These cards are specially designed for frequent travelers. With these cards, you’ll receive the most cashback or reward points when you use travel-related services. Tickets for flights and trains, access to lounges, hotel reservations, priority bookings, and other services are among them.
Business
Business credit cards provide maximum returns or rewards for services or products which are essential for running a business. This can include internet bills to rent bills. This card is especially useful for small and new businesses as they might not always have cash available. Also paying through cards helps a business keep track of its expenses in a structured way.
Student
Usually, credit cards are not easy to get as it depends on your income and credit history. But student credit card is an exception. It has way lesser eligibility criteria as compared to any other. Also, almost no annual fees are incurred on this card, but a lot of offers and rewards are granted. Some banks even offer a secure student credit card which means, in case you fall victim to fraud the bank will ensure the transfer of the amount lost into your account.
Secure
Most of the cards are not secured. By that I mean you don’t have to keep collateral to secure a credit limit. In the case of a secure credit card, you need to Keep collateral which could simply be a cash deposit as well. The value of the collateral will determine your credit limit and hence you have the choice to fix a credit limit. This type of card is the easiest to acquire as you are providing collateral. This is ideal if you want to work on your credit score and find it difficult to get a non-secure card.
Co-branded
If you are loyal to a specific brand then this might be the one for you. Brands of airlines, hotels, or food outlets collaborate with banks. You can spot these credit cards easily as they will have the bank and the brand logo on them. They have a very limited usage and most of the rewards are dedicated to the brand only. But those rewards would the be highest as compared to any other cardholder would receive. Hence if you are loyal and regular with a brand, this is for you.
Bottom line
The fundamental mechanism of a credit card is simple. But to get maximum returns you need to make sure to choose the one which best fits your requirement. Failing to do so might end up paying more in fees and receiving less or non-relevant rewards. If you want to know about how to use these cards safely click here.