The simplest way to answer the question of “what is a credit card?” is simply to say that credit cards are simple ways of accessing small loans from a building society or bank, that you’re expected to pay back relatively quickly. When you spend money on a credit card, your card provider takes over the bill, that means that you owe them the money, but you can choose how to pay it back according to the restrictions and limits of your card.
If you pay back the amount owed on your credit card quickly, then you might find that this is a great way to build your credit rating and borrow very small amounts of money. However, if you don’t pay back the balance owed within a certain amount of time, you will need to pay interest, and possibly even a penalty too.
The amount you need to pay in terms of interest on a credit card is calculated using the “APR” or, annual percentage rate of your card. Because this interest is calculated according to how much you owe, it can grow proportionately over time as your balance accumulates more interest.
How You Can Use Credit Cards
Often, the secret to using a credit card successfully, is borrowing money during the interest-free period. This should be one of the first things you look for when searching for credit cards, as if you can always pay back the balance owed within the interest-free period, then you can basically borrow money for free.
Guaranteeing repayments are sent at the correct time can be easy too, so long as you set up a direct debit from your current account to repay the full amount each month. This way, you can ensure that you never forget a payment. The only problem is that you may suffer if you don’t have enough cash in your account to make the payment required. Defaulting on your payments puts a bad mark on your credit file that could reduce your ability to borrow in the future.
If you can’t afford to pay back the full amount, you will need to see what you can do about paying back as much as possible to lower your interest payments and remove your balance as much as possible.
The Different Types of Credit Cards
There are lots of different credit cards available to choose from, depending on your specific needs and money goals. For example:
Balance transfer cards: These cards are used to help you transfer the existing debt from one credit card into another – often a new one with 0% interest. This is a great way for people to shop around for a more agreeable interest rate, and they can also help you to take advantage of great introductory rates too. Just remember that the 0% offer will only last for a limited amount of time.
0% purchase cards: Another type of credit card, these cards ensure that you do not have to pay any interest on your purchases for a fixed amount of time, so that repayments don’t become too much of a worry.
Credit-builder cards: Designed for people who have no credit history, or a poor credit history, these cards can have a high APR, but they are easier to access for those who would be refused other types of cards.
Low APR Cards: The best solution for many in the credit card world, Low APR cards offer a low interest rate so you don’t have to worry about severe punishments if you struggle to clear your balance each month.
Reward cards: These are linked to certain retailers and airlines, and are all about helping you to get the most out of your typical shopping habits.
Cashback cards: Some of the most popular cards on the market, they provide cash rewards for certain forms of spending, although the cashback may only last for a short amount of time.
Travel cards: Finally, these cards offer commission-free purchasing options overseas, so you don’t have to worry about paying a premium just because you’re heading outside of the country.
When Shouldn’t You Use Credit Cards?
For some people, credit cards can be a wonderful way to spread out your spending habits and ensure that you can still make large purchase while you’re waiting for your pay check to arrive. However, if you won’t be able to make the full repayments, then you’ll need to pay interest which can quickly build up over time, damaging your credit and your future options for finance.
It’s important to make sure that you only use credit cards that you know you can afford to pay off, and never use a credit card in an attempt to manage debt over a long-term period. Too much reliance on your cards could lead to serious financial issues at a later stage.