How Do Credit Cards Work?

Written by Fraser Stewart
Reading time 5 minutes
How Do Credit Cards Work? image

Most people have credit cards. But if you don’t, you may not know how a credit card works or what the advantages and disadvantages. This article will give you unbiased information about credit cards and other similar personal credit products.

What Is a Credit Card?

A credit card is a personal credit product that allows users to access small lines of credit without needing approval. The user gets a set amount they can borrow each month, known as a credit limit. It takes the form of an electronic card, like a debit card, but instead of the money coming out of your bank account when you tap your card, it comes from the credit card company.

How Does a Credit Card Work?

Regarding purchasing items, a credit card works similarly to a debit card. You tap, swipe, or enter card details to make a purchase. As explained above, the lender fulfils the payment instead of your bank account. Many people find this beneficial because it allows them to spread costs if money is tight before payday. The credit card company will send users a monthly bill detailing their purchases and the total cost. Upon receiving the bill, the credit card user has a few options:

Any outstanding balance adds to the next month’s statement, with the addition of interest. Interest rates are usually around 20-30%, so if you are considering getting a credit card, shop around to see which is best. There are also 0% interest credit cards that we will explain further in the article.

Why Do People Use Credit Cards?

You may be wondering why credit cards are so popular. Most people have at least one; some people have multiple. The main reason is that credit cards are great for spreading the cost of things. Even if you pay your credit card balance in full each month, it can help if your expenses do not align with your payday date. For example, if your utility bills are due the day before payday or your kid needs new shoes just before payday. It also allows people to make big purchases they cannot afford, like a washing machine, and pay them off over time. They would accrue interest on outstanding amounts each time.

Many credit card companies often offer additional benefits. They may have advantages, like:

Will a Credit Card Make Me Go Into Debt?

Debt is one of the significant disadvantages of a credit card and one of the reasons you may be reluctant to get one. The people who struggle with credit card debt are those who overextend themselves and make big purchases or multiple small ones they know they do not have the means to pay off. Making minimum or minimal payments will mean you barely pay off the interest on a credit card, and that outstanding balance grows each month.

Credit card debt is easy to avoid if you are smart with your money. Most people avoid credit card debt by only making purchases that they know they can afford. If they make big purchases like a washing machine or holiday that they cannot pay in full at the end of the month, then they plan to pay it off within a set period.

If you get a credit card with the mindset that it is free money, you will likely have some credit card debt. If you use a credit card knowing that you are spending your money, just slightly delayed, you are much less likely to go into credit card debt.

What Is a 0% Credit Card?

A 0% credit card is a credit card that offers 0% interest, usually for a short period. Because there are many different types of credit cards, some use the 0% interest introductory offer to attract new customers. It is essential to read through the terms and conditions, as the 0% interest rate is usually only for the first 12-24 months, and after that term, the interest rate may be higher than other credit cards. A 0% interest rate credit card can be helpful for someone who is trying to payday credit card debt. Some credit card companies will let you transfer your debt from the other credit card company onto a 0% interest rate credit card to give you some breathing space.

Advantages of Credit Cards 

Disadvantages of Credit Cards 

What If I Can’t Get a Credit Card?

You may struggle to get a credit card if you do not have a credit history or have a poor credit history. If that is the case, you should make an appointment with your bank to see if they will be able to give you a credit card. While your bank may not have the best interest rate or benefits, they may be more willing to offer you a credit card because they have more financial data on you.

Alternatively, it would help if you looked into ways to increase your credit score and try again in six months to a year.

Alternatives to Credit Cards 

If you do not have a credit card or do not want to get a credit card, there are some alternatives to credit cards. We will briefly explain them below, but we recommend you do a little research before using one of these methods.

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