Credit cards are important because they provide financial flexibility, convenience, and the opportunity to build a positive credit history, which can unlock future financial opportunities and benefits.

What is a Credit Card?

A credit card is a plastic card issued by a financial institution or bank that allows you to borrow money up to a certain limit. You can use it to make purchases or access cash advances, with the understanding that you will repay the borrowed amount later.

How does it work? A credit card allows you to make purchases on borrowed money, up to a specific limit. You then need to repay the borrowed amount to the card issuer, either in full or through monthly payments, potentially with interest charges if you don’t pay the balance in full.

Commonly Used Terms

Credit card companies often employ flashy marketing techniques to entice users, but it is important to truly understand the underlying meanings behind their offerings. Let’s break down a few key terms:

A.P.R (Annual Percentage Rate): A.P.R represents the cost of borrowing on a yearly basis, including interest and certain fees. It is a measure that helps compare different credit card offers, allowing you to assess the total cost of credit over time.

Interest

Interest refers to the additional amount you pay for using borrowed money. When you carry a balance on your credit card, the interest is calculated based on the A.P.R. and added to your outstanding balance. It is essential to manage interest charges by paying off the balance promptly to avoid accruing excessive interest costs.

Pre-approved

Being pre-approved means that, based on an assessment of your creditworthiness, a credit card company has determined you meet their initial criteria for obtaining a credit card. However, it does not guarantee approval, as further evaluation and verification are typically required.

Minimum Monthly Payment

The minimum monthly payment is the smallest amount you must pay each month to keep your credit card account in good standing. It is usually a percentage of your outstanding balance. While paying the minimum helps avoid late fees, it is advisable to pay more than the minimum to reduce interest charges and pay off the balance more quickly.

Understanding these terms empowers you to make informed decisions about credit card usage, evaluate costs associated with borrowing, and manage your financial responsibilities effectively.

Secured vs Unsecured Credit Cards

Secured Credit Cards:

One advantage of using a secured credit card is that it provides an opportunity to build or rebuild credit. By using a secured credit card responsibly, making timely payments, and keeping balances low, individuals can demonstrate positive credit behaviour and improve their credit history and credit scores.

Unsecured Credit Cards: Unsecured credit cards are typically designed for individuals with established or good credit histories. They are aimed at individuals who have demonstrated responsible credit behaviour and have a higher likelihood of being approved for credit without the need for a security deposit.

Secured credit cards require collateral and are for building credit, while unsecured credit cards do not require collateral and are for individuals with established credit.

Common Mistakes

Overspending: Using credit cards to make purchases beyond your means can lead to high credit card balances and difficulty in repaying the debt.

Paying only the minimum: Making only the minimum monthly payment can result in long-term debt accumulation due to accruing interest charges.

Missing payments: Late or missed payments can negatively impact your credit score and lead to late fees and penalty interest rates.

Maxing out credit limits: Utilizing a high percentage of your available credit can harm your credit score and make it challenging to obtain additional credit in the future.

Ignoring statements: Failing to review credit card statements can result in overlooking errors, fraudulent charges, or unauthorized transactions.

Opening too many credit cards: Applying for multiple credit cards within a short period can adversely affect your credit score and increase the risk of accumulating excessive debt.

Cash advances: Withdrawing cash from a credit card often incurs high-interest rates and transaction fees, making it an expensive borrowing option.