Credit Cards function as a convenient form of borrowing money from a bank. They let you make purchases or pay bills easily. Nevertheless, how they work is often confusing to many due to a lack of knowledge. So, here is a quick guide that elaborates on how Credit Cards work:

• Application process

To get a Credit Card, you must apply through a bank. Then, you need to fill out an application form with personal and financial details, including information about your income, employment status, address, etc.

• Eligibility criteria

When you apply for Credit Cards online, you come across specific eligibility criteria set by the bank. These include minimum age, income, and credit scores. Meeting these criteria increases your chances of approval.

• Credit limits

Once approved, you are assigned a credit limit, which is the highest amount you can spend using the card. It is determined based on factors like income, credit scores, and repayment history.

• Interest rates

Credit cards have an interest rate called the Annual Percentage Rate. If you do not pay the full outstanding amount by the due date, interest gets charged on the remaining balance.

• Billing cycle

You receive a statement every month that highlights your outstanding balance, minimum amount due, transactions, and due date. This billing cycle usually lasts 20 to 30 days.

• Minimum payments

To steer clear of late fees and penalties, you need to make a minimum payment prior to the due date. However, paying only the minimum amount results in interest accumulating on the remaining balance.

• Grace period

Some Credit Cards offer a grace period, usually between 20 to 50 days. During this period, no interest is charged on new purchases if you have paid the previous month's balance entirely.

• Rewards and benefits

Many Credit Cards offer rewards, like cashback, reward points, discounts, and travel benefits. These perks vary depending on the bank and the type of card.

• Security features

Credit Cards come with security features like EMV chip technology, PIN verification, and One-Time Password. These are meant to protect your online transactions against fraud.

• Misusage

While learning how Credit Cards work, you must also know the consequences of misusing them. If you overspend, miss payments, or exceed the credit limit, you can invite yourself a host of problems. Examples include debt accumulation, lower credit scores, and financial stress. Hence, it is important to use Credit Cards responsibly.

• Impact of credit scores

Your credit behaviour, including timely payments and responsible credit utilisation, affects your credit score. A decent score increases your likelihood of securing Loans and other financial products.

• Associated charges

Credit Cards may involve various fees, including annual fees, late payment fees, over-limit fees, and cash advance fees. Understand these charges before using the card.

Conclusion

Credit Cards provide a convenient means to make purchases and manage finances. However, understanding how they work is essential for financial well-being.