How do credit cards work?

Using credit cards can make your life easier, but it can also trap you in high-interest debt. Carrying a balance on your credit cards can delay your financial goals or even prevent them altogether. To avoid this, it's important to understand how credit cards work and how you can make them work for you.

1.How do credit cards work?

The easiest way to think of a credit card is to view it as a short-term type of loan. Credit cards offer you a line of credit (loan) that can be used to make purchases, balance transfers, and/or cash advances. These cards allow you to pay the loan amount in the future either in cash or, in exchange for interest, by making smaller payments.

2.Why are credit cards so attractive?

Interestingly when you pay with a credit card it doesn't feel like you're actually spending your money. And coincidentally you are not doing it, but, as already mentioned above, you are really borrowing money.

You know that you will eventually have to pay off the balance on your credit card, but the promise of small minimum payments in exchange for getting a product or service instantly makes credit card purchases quite attractive. And not only that, credit cards usually offer other types of benefits that make them even more attractive, such as discounts at certain stores, points for frequent hotel and airline customer programs, and even access to private lounges at airports.

Credit card companies are well aware of the psychological disconnect and the feeling that we all feel that “we are not spending our money”, and they make the most of it. This is how so many people end up with huge credit card debt.

But not everything is so negative. If you know how they work before you start using them, you can turn credit cards into some pretty useful financial tools that can help you build a credit history and improve your financial situation.

3.How to use credit cards correctly?

Using a credit card responsibly and conscientiously can help you build good credit so that when it's time to buy a new home or car, you qualify for the best possible terms and lowest interest rates.

As you probably already deduced, the objective of the banks or companies that offer credit cards is to get you to use your card for everything and that your monthly payments are as small as possible.

Always keep in mind that the more money you owe and the longer you owe it, the more money the credit card companies make. That's why these companies seek to discourage you from paying your monthly balance in full by offering you the option of minimum payments.

The safest way to use a credit card to get all its benefits without running the risk of getting into debt is to keep full control of your expenses and make sure that you can always cover the total balance of your account at the end of the month. This way you will make sure you get the benefits without worrying about having to pay interest on your purchases.

4.How to choose a credit card?

Before choosing a credit card, think about how you are going to use it. If you pay the balance in full each month (highly recommended), the annual fee and other fees may be more important than the PR (the interest rate charged), so look for a card with no annual fee or one with a low charge. If you carry a balance and pay for your purchases over time, the APR and method of calculating your balance are most important, so you'll want to look for the lowest interest rate and longest grace period.

Note: Some credit card companies charge you an annual fee for administration and for providing you with the benefits of their card.

5.What other benefits do credit cards offer?

Some credit cards, usually those with a higher annual charge, include extra benefits such as accident coverage when renting a car, extended warranties on certain items, travel insurance, special discounts, and other exclusive benefits. As enticing as these may sound, you should consider exactly what you are getting for the privilege of paying a much higher annual fee.

“Internal” credit cards, also called store cards, allow you to load purchases at department stores and gas stations and make monthly payments, including interest charges. Many stores offer certain benefits to their cardholders, such as additional discounts on their products and exclusive shopping opportunities. The clearest example would be the Amazon card that offers certain benefits and discounts to its bearers.

Conclution: How do credit cards work?

Credit cards can be quite useful financial tools as long as you have full control of your expenses and can cover the entire balance (or most) of it each month. Personally, I use credit cards to get travel benefits like free hotel nights, deep discounts on flights, and upgrades when traveling by air or renting a car.

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