How Does a Credit Card Works

With increased financial inclusion, banks find innovative ways of maintaining and attracting new customers. Providing customers with credit cards on favorable terms and conditions is just one of the many ways in which financial institutions do this. What is a credit card, therefore? A credit card is a payment card given to a customer of a specific financial institution to make purchases of goods and services up to the certain agreed amount on condition that the cardholder will make payments of the amount already used at a future date. It works more like a cash advance that is capped at a specific amount. Whenever the cardholder uses the card to make payments, the amount in the card reduces in the same proportion of the payments made.

 

This means that the cardholder owes the financial institution the amount already used which is due for repayment at the agreed date which in most cases is done monthly. Consequently, in the event the cardholder is late to make payments, the card attracts late fee charges. Fees charged on credit cards.  It is important for prospective cardholders to first understand the fees charged on the credit cards and the terms and conditions attached to them. An annual credit card fee is usually charged to cardholders as a fee for the privilege of having it. This fee varies depending on the type of the credit card and is agreed at the time of acquiring it.

(Check our article on cheap out of country trips where you can use your credit card)

Equally, a finance charge is charged as interest on any unpaid amount at the end of the grace period agreed which in most cases is between 20 to 25 days. However, if the cardholder makes payment within the grace period, it means that the finance charge is not applicable.

 

Advantages of a credit card

Even though the concept of the credit card works more or less the same as a loan, the difference is that, upon payment of the funds used in a credit card at the agreed date, it is immediately available for use by the cardholder. Similarly, a credit card allows the cardholder an opportunity to continue running debt on the card subject to pre-agreed interest rates on the same. Credit cards come with following advantages:

 

Convenience for making purchases

 

Credit card holders have the advantage of making purchases using their cards which is more convenient than carrying cash with them. As such, it also saves time since with just a swipe of the card; the transaction is completed in real time. Similarly, it is a secure way of making purchases and in the event, a cardholder doesn’t have enough cash to make any payments, the credit card come in handy subject to its limit.

 

Improves your credit score

 

Unlike others financial instruments, credit cards have the advantage of improving a cardholders credit score whenever repayments are made in time and the terms and conditions of the card are adhered to. This means that the holder can get a healthy loan facility at any financial institution since their credit score is high and gives a positive outlook on the person.

 

Redeem points and travel insurance

 

Financial institutions try as much as possible to make their credit cards attractive to their customers. They achieve this by adding incentives to the cardholders every time they use their cards. Most of this cards whenever they are used they gain points which can be redeemed for discounts on the interest charged or used to make purchases on specific shops or facilities that have entered into the agreement with the financial institution.

 

Though credit cards are an integral part of the financial institutions, prospective cardholders should be careful when choosing the type of credit cards they wish to subscribe to by reading the terms attached to each and the interest