Credit cards can be really useful – the convenience allows you to make large purchases in the hope that you’ll pay off the debt before the due date.
But unfortunately, even though it looks like everyone has heard of and use a credit card, there are lots of people who haven’t heard of it or don’t understand it at all. If you need clarity on anything credit card, this credit card guide will help.
If you talk to people, you will find that they are in one of two camps, the first camp relies on credit cards for making purchases, and camp two doesn’t want to touch them and would only use them as a last resort.
Because there’s such a broad spectrum of credit card usage, it’s important to understand why credit cards exist and how they can help or hinder your financial situation.
Credit lets you buy things and pay for them later instead of taking money out of your account or not having enough money.
So, when you use your credit card, you aren’t spending your own money. Instead, the credit card company pays for everything you’ve bought and sends you a bill at the end of the billing cycle.
If you pay this bill in full when you get it, you won’t have to pay any interest.
There are different types of credit cards to choose from, and it’s easy to get lost in the options. You have to figure out what kind of credit card would work best for you, your situation, and your goals.
Here are some types of credit cards available on the market.
To use your card responsibly, you must first understand how it works. As mentioned earlier, you use the cards to buy things and get to pay later when you get the bill at the end of the billing cycle.
Every credit card company’s billing cycle is different. You can determine this for your card by either calling your credit card company or checking your credit card statement, which starts and ends at the beginning and end of a billing cycle.
Pay your entire credit or statement balance to avoid interest. You can also pay the minimum or a different amount, and interest is charged on the outstanding amount.
Most banks allow you to set up a monthly direct debit to clear your balance. This ensures that you never miss a payment, which can have a negative impact on your credit report.
Usually, the company that issued your credit card will give you a grace period to pay off the credit card bill. This added time will end on the due date. You won’t pay interest if you pay off your balance by this date.
Many credit card companies charge annual fees that you must pay every year to keep your card, so consider this.
Pros
Cons
An issuer is a bank or financial institution giving out cards and lending money to people who have them, for example, Barclays or HSBC.
Networks include Visa, Mastercard, and American Express, which are businesses that process credit card transactions.
Card networks and card issuers work together to handle customer transactions at stores.
For example, suppose you bought something from Amazon or a grocery store and paid with your HSBC credit card. In that case, you (the customer), Amazon/grocery store (the merchant), Visa (the network), and HSBC (the issuer) are all part of the payment process.
When you pay with a credit card, it sets off a chain of events. Here’s how it works:
This digital communication occurs almost instantly.
When you apply for credit, your credit score is important. Lenders look at your credit report to figure out how risky you are and how likely you are to pay back the money. a good credit score doesn’t just affect if you will get a credit card but other types of credit you might apply for and the rates you get
Credit reference agencies are in charge of getting your credit history and storing it. Experian, Equifax, and TransUnion are the largest in the UK.
Your card affects your credit report because lenders tell CRAs about how you pay back debts. Keeping up with your card payments will help you build a good credit history. Failure to make payments will result in a negative report to credit reporting agencies.
The bank accounts linked to both cards are different. Your bank account is linked to your debit card, while a bank gives you a revolving line of credit that you can access through a credit card.
This is huge because, as we have said earlier, Credit card companies pay for purchases, and you pay them back later, while Debit cards use money from your bank account.
You can call to have a fraudulent charge removed from your credit card and not lose money. However, the bank must investigate before reversing the funds if you lose money fraudulently from your debit card.
Credit cards are safer for making payments than debit cards.
You should weigh the pros and cons of getting a credit card for yourself to make a decision, but if you have a hard time keeping track of your finances or you worry that you might be tempted to overspend, you should avoid getting one.
But if you can manage your spending and clear your balance monthly? Then a credit card can help you buy what you need now and pay later.
What should I look for in my first credit card?
The best credit cards for a beginner have perks. Here are some first-credit-card features to consider.
How to apply for your first credit card
1. Clear your balance. It’s best to use your credit card only for purchases you would normally make so you can pay off your balance before each billing cycle’s grace period and make sure your spending aligns with your monthly budget.
2. Low credit utilization, or how much of your available credit you use, affect your credit score. High credit utilization makes you look riskier to lenders and hurts your credit score.
To determine your utilisation ratio divide your credit card balance by your available credit. For example, your credit utilisation is 25% if you have a £2,000 credit limit and a £500 balance.
Keep credit card usage under 30%.
3. Track spending with credit cards. Credit cards can help you monitor spending alongside a budget.
4. Reward Yourself. Use a rewards credit card responsibly and strategically to maximize rewards. How?
5. Save with a 0% intro annual percentage rate (APR). Paying interest on a credit card balance can make getting back on track more difficult. A balance transfer card with a 0% introductory APR over a certain period can help you save money.
Here are some key credit card terms.
APR: The annual cost of borrowing money. APR includes interest and any mandatory fees, such as an annual fee. Lenders only have to offer the advertised APR to 51% of cardholders; the other 49% can be offered a different (higher) rate. Hence the term representative APR.
Balance transfers. When you transfer a balance, you move your existing credit card debt to a new card.
Cash advance: Getting cash with a credit card. At an ATM, for example. Cash advances have high APRs and accrue interest immediately; avoid them.
Statement balance: the amount of money still owed on your credit card as of the last day your statement was valid. You can avoid interest charges by paying the full amount each billing cycle.
Minimum payment: In the case of a credit card, the minimum payment is the bare minimum that must be paid by the due date. The card issuer can charge a late fee if you pay less.
Credit score. A credit score measures your creditworthiness or likelihood of repaying debts.
Credit utilisation ratio. How much you owe on credit cards compared to the total available credit is your credit utilization ratio (the total of your credit limits).
