What are credit cards? How do they work? How do credit card companies make money? And most importantly, Should you be using a credit card? What are the pros and cons?
Let us an example - Suppose you're a school student and suddenly there's a pandemic. All you're classes are now online. But to attend these online classes, you'd need a smartphone. But you don't have a one. You need to buy a Smartphone urgently. But there's insufficient money in your bank account for buying it. So you ask your parents to transfer some money to your bank account. But it'll take 2-3 days to transfer the money. But you need to buy a smartphone before your class the next day. What other options are there? In such situations, you can use credit cards to make the purchase immediately. And pay for it later. So essentially, a credit card is a card that helps you in purchasing things instantly. But you can pay for them later. At the end of the month. Generally, if there's enough money in your bank account. you withdraw cash and use it to make payments. The second option is to use a debit card. It is directly linked to your bank account. When you make a payment through your debit card, then the money is deducted from your bank account and transferred to the other party. But in a credit card, the bank makes payment in your behalf. to whomever you're trying to pay. And then at the end of the month, you repay all the expenses of that month to the bank. You can take more than a month in repaying the bank's money. Then the bank will charge high interest. Similar to a loan. The bank issuing you the credit cards, are distinct from Visa and MasterCard. These two are only involved in the payment processing. And there is a magnetic strip on the other side of the credit card. As well as the CVV number. It is very important to keep it safe and secret. Otherwise, you may be a victim of fraud.
And now how will you benefit from using a credit card? I talked about one advantage at the beginning, That if you want to buy something immediately, but you want to pay for it later at the end of the month, you can. It helps to meet immediate expenses.
The second major advantage is that using a credit card is less risky than using a debit card. if you're a victim of fraud, then in the case of debit card, the money will be directly deducted from your bank account. But in the case of a credit card, your bank or the credit card issuer will pay on your behalf. And if there's a fraud, they can investigate it. If there's actually a fraud, then they'll get your money back. So the risk making payments is borne by the bank.
The third major advantage is the rewards that you get for using a credit card. The rewards system vary depending on the bank and the type of credit card. In some, you may get cashback. In others, you may get heavy discounts. You may even get insurance in some. Like insurance to be paid if you meet with an accident. You can also get travel insurance for free with your credit card. But nowadays, almost every credit card comes with some sort of a rewarding point system. You can collect points and can then exchange those points to buy something expensive.
The disadvantages of credit cards might already be evident to you. As I've said, if you don't make payments on time Then you'd have to pay heavy interest. And fall into a debt spiral very quickly. Where once you don't make payments the payment on time, then so much interest is charged that you end up paying a higher amount. You wait for a few more days and the amount increases further. Soon, in some days, or maybe a few months, the amount may become so large that you can't repay.
So the question arises Should you use a credit card? or you should not? The answer to it is very simple friends. If you make timely payments of the credit card bills, then you can use it. On the other hand, if you use credit cards to buy things that you can't afford, if you think that now i may not have the money, So I'll use the credit card to buy it, and I'll arrange the money from somewhere within 30 days, then please don't use a credit card. You may fall into debt trap. Third, if you want to get a credit card because of the rewards, then evaluate the situation of a bit. The various fees that you will pay to use that credit card, often the processing fee is around 2% - 3%, and the reward that you'd get in exchange, would they actually be worth it Or you still loosing money. So, you'll have to calculate it to a bit.
IMAGES CREATED BY MYSELF