Often referred to as our best “plastic friends” credit cards have become an indelible portion of our everyday lives. They can be used to purchase anything from a fast food meal to a luxury car. In fact, the majority of individuals now rarely carry around cash. Credit cards can provide an additional level of security due to the fact that thieves can rarely use them fraudulently. So, these handy devices seem to be one of the best opportunities on the planet to enjoy a bit of financial freedom. However, there is a bit more than initially meets the eye. Let's look at the basic principles behind a credit card, some of the most important concepts to keep in mind as well as a few key suggestions to adopt before entering into any type of contractual agreement.
How Does a Credit Card Function?
The principle behind a credit card is arguably as old as the banking system itself. In essence, a credit card is an agreement between a client and a lending institution. The client is provided with a certain amount of credit (known as the balance). He or she can spend this money at their discretion and the provider will charge interest on any purchases (referred to as the APR or the annual percentage rate). The level of this interest will depend upon several factors such as the credit rating of the applicant. As long as monthly payments are made on time, this rating can improve and as a result, the cardholder will be offered higher balances in the future.
Things to Watch Out For
Like many other types of financial agreements, it is the ultimate responsibility of the consumer to use these cards correctly. There are a few habits which should absolutely be avoided at all cost. These include:
- Overdrawing a balance on a regular basis.
- Failing to make monthly payments.
- Applying for a card that charges high interest rates.
- Purchasing too many products without having the ability to repay this debt.
Yes, you read that last sentence correctly. Any money owed to a credit card company is effectively a form of debt. If this debt is not repaid in a timely fashion, your credit score (and ability to borrow additional money) will be negatively affected.
How to Choose the Best Credit Card
It is always best to stick with large providers such a Visa, MasterCard and Discover. Take a look at the balance limitations as well as the projected APR. Other questions to address include any additional charges or fees, overdraft charges if you happen to withdraw too much money and the types of customer service that are available in the event that a question arises.
Credit cards can be very useful tools if they are employed in the most appropriate fashion. Please do not hesitate to refer back to this article and use it as a guide when searching for the best plans on the market.
