As much as we love how easy it is to swipe our credit cards, they’re not as straightforward as using cash. Credit cards come with conditions that you will always need to keep in mind to use them responsibly.
Are credit cards a form of money?
No, they are not. They are a form of credit, given by lenders. In simple words, you’re using a loan to pay every time you swipe that you agree to pay back plus interest or any other applicable fees. There is a limit set on how much credit you can use on credit cards, which is dependent on your credit risk. Credit cards are not an endless supply of money, even though they seem that way. It is not your own money that you are using to buy that new outfit from your favourite store.
Money is a tender in the form of coins or bills that you exchange for goods or services, without the condition to pay anything else. You’re not loaning your money out, you are spending it. Unlike credit cards, which is money borrowed from a lender that you will eventually pay back.
How does a credit card work?
Your credit card, that thin piece of plastic between your fingers, can feel like having all the buying power in the world that you need. They are just credit that functions as a form of payment to merchants that accept credit cards. As stated before, a credit card has a set limit that you can spend up to, which is determined by your ability to pay back what you spend. This credit, or borrowed money, has to be paid back in full within a certain time frame along with interest.
Credit cards have one of the highest APR rates compared to other credit forms like loans. Unpaid balances are charged interest one month after the purchase is made unless there is a grace period in place. A 21-day grace period is, by law, obligated to be offered to borrowers. This is why paying off your balances in full before your grace period is up is the best decision in staying out of harmful debt and keeping your credit score as high as possible.
Your credit card issuer can also grant a different line of credit that allows you to borrow money as cash advances through bank tellers or ATMs. These cash advances often have even higher interest rates than credit cards, plus no grace period where interest is not applied. All the more reason to avoid taking out a cash advance.
Types of credit cards
The major credit cards, for example, Visa, Mastercard, Discovery, and American Express, are issued by lenders such as banks, credit unions, and other financial institutions. Reward credit cards are credit cards that come with incentives like gift certificates, cash back on purchases, rental discounts, etc. Avoid signing up for a credit card only for the rewards, as you are still paying interest.
Store credit cards are issued by retailers and are often easier to apply to than major credit cards. You can only use branded store cards to make purchases at your issuing retailer and can benefit from promotions, sales, or discounts.
Secured credit cards are cards that are secured with a security deposit. These cards also allow cardholders to take out a line of credit (LOC) that is equal in value to the security deposit put down. This LOC can be refunded if you show that you can use your credit card responsibly over time.
Other types of credit cards like student and business credit differ in terms of who issued the credit card and its purpose. For example, student cards are often used for textbooks, stationery, or food purchases made on campus.
Do you lose money using a credit card?
In some ways, yes you can. If you miss payments or make continuous minimum payments towards your credit cards, you can end up paying more in interest and late payment fees that were not anticipated. Using your credit card irresponsibly can cost more than what you are spending. It’s important to use your credit card for purchases that you know you can pay back and are financially secure enough to make repayments on time and in full. By keeping this in mind, your credit card will be a useful tool to build your financial status and not one that brings it down.