How does credit card work? Unlock the secrets to smart spending

Credit Card: Beginners should learn about credit cards to use them wisely. They allow borrowing up to a limit, requiring repayment by the due date. Eligibility varies by age and income, with processing typically taking two weeks and varying joining fees.

Using a credit card can be daunting for beginners, but understanding its functioning can help you use it efficiently and make timely bill payments. Let’s dive into how credit cards work, key terms, and the process behind transactions.

What is a credit card?

A credit card is a form of borrowing with a defined credit limit offered by a bank or non-banking financial company. You can borrow money up to this limit, which must be repaid by the due date or can be paid in instalments (EMIs).

Credit cards can be powerful tools for managing finances and making purchases, but using them wisely is key. Here’s a breakdown of how they work and some tips for smart spending:

Important credit card terms

• Billing cycle: The period between two consecutive credit card statements.
• Credit limit: The maximum amount you can borrow using your credit card.
• Minimum payment: The minimum amount, including EMIs and other charges, that you must pay if you cannot repay the total balance.
• Interest: A fee charged on any outstanding balance on your credit card.
• Balance: The amount spent on the credit card that has not yet been repaid.

How Credit Cards Work

1. Credit Limit: When you get a credit card, the issuer gives you a credit limit, which is the maximum amount you can charge to the card.
2. Making Purchases: You can use the card to make purchases up to your credit limit. The card issuer pays the merchant on your behalf, and you owe the issuer that amount.
3. Billing Cycle: Credit cards operate on a billing cycle (usually a month). At the end of each cycle, you receive a statement detailing your purchases, the total amount due, and the minimum payment required.
4. Grace Period: Many cards offer a grace period, usually around 21-25 days, during which you can pay off your balance without incurring interest.
5. Interest Rates: If you don’t pay off your balance in full by the due date, interest will accrue on the remaining balance, often at a high annual percentage rate (APR).
6. Rewards and Benefits: Many cards offer rewards like cash back, points, or travel perks for purchases. However, be mindful of annual fees and interest rates.

Tips for Smart Spending

1. Pay On Time: Always pay at least the minimum payment by the due date to avoid late fees and damage to your credit score.
2. Pay in Full: If possible, pay your balance in full each month to avoid interest charges.
3. Monitor Your Spending: Keep track of your purchases and stick to a budget. Many apps can help you categorize spending.
4. Use Rewards Wisely: Take advantage of rewards programs but don’t overspend just to earn points.
5. Understand Fees: Be aware of annual fees, foreign transaction fees, and cash advance fees. Choose a card that fits your spending habits.
6. Check Your Credit Score: Regularly monitor your credit score. A higher score can lead to better interest rates and credit offers.
7. Limit Your Cards: Having too many cards can lead to overspending and make it harder to manage payments. Choose a few that best meet your needs.
8. Set Alerts: Use alerts for due dates and spending limits to avoid missed payments and overspending

Credit cards can be beneficial for building credit and earning rewards, but they require discipline. By understanding how they work and following smart spending practices, you can enjoy the perks without falling into debt.