A basic guide to understand the workings of a credit card

Plastic money or credit cards have become an indispensable thing in everyone’s life. With its easy to handle features and mobility, credit cards have earned popularity over time. If someone is using a credit card for the first time, there are some factors that are needed to be aware of. The functioning or the mechanism in which a credit card works can help a new user to understand how to use a credit card. Here are some of the critical aspects related to the credit card that defines its functioning in clear terms.

The difference between a debit card and a credit card

There is a difference in terms of transactions and their nature between debit cards and credit cards. Though both are commonly referred to as the plastic money, the way they treat the transaction remains completely different. The debit card uses the money that you have in your account for making payments. Hence there is no loan or credit part associated with it. As long as you have money in your account you can use the same for your requirements. When it comes to credit cards, it uses the money of the issuer at the first hand and then the same gets reflected in a bill that you need to pay in a later date. Hence, with a credit card you can make a purchase worth an amount that might not be there in your account and can pay later. Therefore, we can conclude that credit cards allow us flexibility in purchases and other transactions.

The important terminologies associated with credit cards

Credit Limit: The credit card allows you to spend money up to a certain extent and the same is called credit limit which gets issued by the card issuer and it refers to the amount you are entitled to get at a time. The higher your salary scales are the better becomes your credit level. Credit levels are decided by the issuing authorities in general.

Balance: As far as credit cards are concerned, balance refers to the unpaid amount that you have loaned earlier. For example if you have made a purchase of INR 1000 and has not yet paid it, your balance would be INR1000.

Available Credit: This refers to the difference between credit limit and balance. Suppose if your credit limit is INR 1000 and your balance for the time being is INR 400, it means that you are eligible to get a loan of INR 1000 out of which you have already used INR 400. Hence you have INR (1000-400) =INR 600 more for your disposal.

Billing Cycle: Billing cycle refers to the time limit given to every user to pay off bills. Once you make a purchase using your credit card, you will receive a bill which needs to be paid back in a month’s time and this is referred to as the billing cycle.

Minimum Payment: It refers to the amount that is mandatory for you to pay as a payment of your bills which constitutes generally a small percentage of the balance amount. If you fail to repay the amount, you might be charged with a late fee by the issuer and in case of further delay; the incident could be reported to the credit bureau that will affect you credit reports in the long term.

APR: It stands for the Annual percentage Rate. If you fail to pay your full balance amount at the end of every billing cycle, the remaining debt value will be charged with this rate of interest at the end of the year.

Once you have your credit card, make sure that you know about all the terms and functionalities associated with it as this will be a critical instrument in deciding your financial health. Avoid skipping payments on due date to maintain your credit score. To know more about credit cards you can click here.

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