Since the creation of credit cards, a lot of users still wonder How Does Credit Card Work? This is a complete guide on the major things you need to know about a credit card, how to improve your credit score, and lot more.
If you still wonder what is the difference between a credit card and a debit card, then you can still read on this article.
What is a Credit Card?
This is a physical card that can be used to make purchases, pay bills or withdraw cash (this depends on the card). It is like a short-term loan. When you create a credit card account, the credit card company gives you a credit card and a limit. The limit is the amount of money that the credit card lets you use to make purchases or pay bills. As you use from your credit limit, it gets reduces. So, you are required to pay off outstanding bill to start a new billing cycle.
When used properly, a credit card is a secure and flexible way to pay and to spread the cost of major purchases. Note that if you only make minimum payments or you run up bills that can’t be paid back, then credit card can be costly and can lead to spiral of debts.
How Does Credit Card Work?
Credit cards allows the user to spend money up to a given limit. Every month, the user will be sent an invoice of what they have spent in that month. It is very important to clear off the balance of your credit card in full every month. Though, you can still pay off at least the minimum amount. This can help you increase your credit score and a chance to get an even higher credit limit.
The minimum amount is set by the credit card issuer. This is at least 1% of the outstanding balance, and interest, with any default charges and the annual fee if included. If the credit card balance is paid in full, then you won’t be charged with interest.
How to Improve Your Credit Score
As said earlier, credit cards can be used to improve your credit score. The credit card issuer will report each monthly payment that has been used by you to the three credit reporting agencies.
With every month bill you pay; you will be contributing to your credit score rating. Using the credit card responsibly and regularly can allow you build your credit as it shows the lender that you can manage your credit well.
Credit Cards vs. Debit Cards
Still wondering the difference between credit card and debit card, then here you get it:
Credit card offers users a line of credit that can be used to pay for items purchased, balance transfers, cash advances, etc. and requiring you to pay back the amount used in the future. Simply put that a credit card is like a loan you take and pay back fully without interest or partly with interest when due.
While Debit cards offers the user a way to withdraw money directly from their bank account. This money is not a loan and there is no interest charged. You will only be able to use the money that is deposited by into the bank account the debit card is linked with.
How to Compare Credit Cards
If you are in search of your first or next credit card, then you should do some comparison. Some of the key facts to check out:
- Regular variable APR for purchases
- APR for balance transfers and cash advances
- Promotional APR terms and conditions
- Annual fees
- Rewards programs
- Introductory bonus offers terms
It is also essential to check out other benefits and features if provided.
Best Credit Card
Here are some of our reviewed best Credit Card you can check out:
- Chase Freedom Flex℠ – Best Cash Back, Best No Annual Fee Card
- Wells Fargo Active Cash® Card – Best 0% APR 5.0 and Best Flat Rate Cash Back
- Capital One Venture X Rewards Credit Card – Best Flexible Rewards Card
- Chase Sapphire Preferred® Card – Best Entry Level Travel Card
- Chase Sapphire Reserve® – Best Card for Travel Insurance
- The Platinum Card® from American Express – Best for Luxury Travel and Lifestyle Benefits
- United Club℠ Infinite Card – Best Airline Credit Cards
- Aeroplan® Credit Card – Best Mid-Tier Airline Card
- Hilton Honors Aspire Card from American Express – Best Hotel Card
- Discover it® Student Cash Back – Best Credit Cards for Students
- Wells Fargo Reflect℠ Card – Best Balance Transfer for Long Payment Window
- Amazon Prime Rewards Visa Signature Card – Best Credit Cards with Category Bonuses
- Blue Cash Preferred® Card from American Express – Best for Groceries
- S. Bank Altitude® Go Visa Signature® Card – Best for Dining
- Petal® 1 “No Annual Fee” Visa® Credit Card – Best Cards for Customers with Bad or No Credit
- Discover it® Secured Credit Card – Best Secured Card
Ensure to do comparison research before choosing your preferred credit card. Each of the credit card have benefits for different purposes.