Credit cards are part of modern financial life, and we can’t ignore their importance. The use of this small piece of plastic affects your credit score in good or bad ways. You need to know all about credit cards to make wise decisions and improve your financial state.
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What Is It?
Technically, it’s a kind of borrowing. Bank gives you a card with the set limit. You have access to the funds and can use them any time you want. But you have to return them in a limited amount of time.
Some banks offer a grace period, and if you return the funds in time, you pay no interest. It’s a great option for medium-cost purchases. After the grace period, the interest rates are applied, and they can be higher than in the case of a personal loan.
How Does It Work?
The card itself is just a key to the account opened by the bank. Before signing an agreement, the bank calculates the limit on the basis of multiple factors such as your history, other debts, and your employment. Once you receive a physical card, you can spend the money as you wish.
All the actions with the card affect the history because it’s a loan too. You spend borrowed money, and if you don’t return it in time, your score decreases. Even the set limit and the amount of money you use are factors included in the score calculation.
How to Use It?
You can use a credit card just like other cards. You can pay for goods and services or get cash in the ATM. But before using it, read the agreement carefully. Sometimes, banks apply fees for withdrawing funds as cash. Other cards don’t offer a grace period for such transactions. You should know the specifics of your card.
There are usually no additional fees when it comes to paying for products or services. You must return the money in the set period in parts or as one transaction. Remember that I can harm your credit score if you still have debt at the beginning of the next month. Take it into consideration when you want to pay off the debt in multiple payments.
Difference Between Credit and Debit Card
Statistics show that American consumers are using credit and debit cards more than ever before. In fact, the average person has 2.6 credit cards and 1.9 debit cards, according to a recent study.
But what’s the difference between these two types of plastic?
Debit cards are linked directly to your checking account, so they can be used to withdraw cash or make purchases. When you use a debit card, the money is deducted from your account immediately. Credit cards, on the other hand, are a type of loan. You’re borrowing money from the credit card issuer, which you will need to pay back with interest. This means that you can carry a balance on a credit card, whereas you can’t do that with a debit card.
As we said before, the way of using these two types of cards can be similar. But at the same time, they are different. In the case of a debit card, you spend your own money from your account. These cards don’t affect the credit history in most cases, so paying your bills with a debit card is relatively safe. In other words, a debit card is a tool for convenient keeping and managing your finances.
A credit card, on the contrary, is an instrument for borrowing. All the transactions you make affect the total score you have. You can use it both to improve or to damage history. In fact, you spend the bank’s money, not yours. And you have to return the borrowed sum, in some cases with interest. From this point of view, a credit card is similar to any kind of personal loan.
How to Get It?
The process of getting a credit card is easy and straightforward. But the limit and conditions can differ dramatically depending on many factors, including the bank and your history. If you are older than 21, you can apply online or go to the bank to ask for a credit card.
The financial organization will study your application and make a background check against all available databases. After that, the bank offers you certain conditions. You can agree and sign the documents or refuse and try to get a card in another bank.
Don’t be afraid to apply for a card if you have no history. In the beginning, your options can be limited, but after some time, the bank can raise the limits and offer you larger sums. Usually, people have no problems with receiving a card.
How to Cancel It?
Having many credit cards complicates money management and negatively affects the score. That’s why you may consider closing some of these accounts. Even if you have no debt, keeping the card open is not wise. Some of them have annual fees, and you can create debt even without knowing.
Make sure that you paid off all the money you borrowed, and after that, contact your bank. Ask the issuer to close the account and cancel the card. After you get the confirmation and ensure that the account is closed, shred the card with scissors and forget about it.
Pros and Cons
The coin has two sides, and using a credit card has both advantages and downsides. Let’s discuss both.
- it helps create credit history;
- it’s a convenient way of borrowing;
- it’s a good financial tool.
- interest rates can be high;
- easy to spend more than you planned;
- it can damage the credit if used irresponsibly.
As you can see, a credit card is not evil. The consequences depend on your decisions. Use it carefully, and build a solid history for future borrowing.
A credit card is not a magic wand. If you are not careful and use the card recklessly, it can lead you into trouble. Just like any financial tool, these cards require planning and thinking. Before applying for the card, you should know how it works and what you can do with it. Increasing your debt is not a wise idea.
But if you can manage your finances, credit cards can work miracles for your financial state. It’s a tool, and only you decide how to use it. That’s why you should think twice before spending the borrowed money. And read the whole agreement carefully to eliminate unpleasant surprises later.