Picture this scenario: You aim to buy a brand-new iPhone 15, a shiny tech that promises to simplify your life. But your wallet feels a little light. This is where Credit Cards come in handy, offering you a way to buy now and pay for the phone later.
When you use a Credit Card to make a purchase, you are not paying for the item with your money. Instead, you borrow funds from the bank and repay it to them later with interest if you do not pay on time. The bank gives you a credit limit, the maximum amount you can borrow. You can spend any amount up to your credit limit but repay at least the minimal monthly payment on time to avoid paying late fees and interest charges.
How do Credit Cards work?
You should understand how Credit Cards work as they are essential for responsible and effective use. When you use them for purchases, the merchant’s bank requests the issuer to approve or decline the transaction. If it gets approved, the merchant’s bank receives the payment, and your credit limit is reduced by that amount. You receive a statement from your bank at the end of each month showing your purchases and payments.
You also get a grace period of 50 days from the statement date to pay your dues without incurring interest charges. However, if you fail to repay the entire balance, you pay interest on the remaining amount.
Should you own one?
Whether or not you should apply for a Credit Card depends on your goals and circumstances. They are valuable tools for building credit, managing finances, and using reward programs. However, you should use these financial tools responsibly to avoid falling into debt traps and preventing financial problems. Here are some tips:
- Assess your affordability:It is important to spend only what you can afford to repay at the end of the month. If your demands exceed the budget, cut unnecessary expenses and streamline your financial position.
- Pay on time:When you own Credit Cards, note the payment due dates and statement dates to avoid late payments and other penalties.
- Low credit utilisation ratio:Keep your credit utilisation ratio low, wherein your total outstanding balance should not go beyond 30% of your total credit limit.
- Fees: You should be aware of the fees and terms of your Credit Card. When you receive the documents from the bank, read them properly and carefully.
Conclusion
If you are considering applying for Credit Cards, you should understand your spending patterns, your ability to pay off balances on time, and the features that suit your lifestyle. Select the card type carefully and ensure it aligns with your needs.