Owning a credit card has become an absolute necessity for millions of people these days. So, along with the salaries and business professionals, college students too have credit cards for making fast purchases. But, have you ever wondered how they work?
Understanding the Working of Credit Cards
Banks will consider aspects such as salary or total monthly income before issuing you a credit card. The banks will decide on what should be the maximum limit on your card based on your past credit history and repayment capacity. Thus, a credit card is actually a small loan taken from a bank to fulfill your immediate necessities with a promise that you will repay later. This is opposite to the principle of the debit card which you use instead of cash.
In order to apply for a credit card, you will have to approach the bank and fill up an application form. Along with furnishing all true details regarding your income and personal information, you will have to attach necessary documents such as your salary slips, identity proof, residence proof etc. When you start using the card, you will be getting monthly bills from your bank which will be inclusive of the bank fee for the services rendered to you. For the payment, you will generally be given two options. The first one involves making the entire payment of the due amount while the second one is the least amount due payment. If you pay the amount in parts, you will have to pay the finance charge levied by the bank. Since heavy amounts are charged by the means of finance charge, such charges are more beneficial for the lenders than for the customers. So, for all credit card users, it would be advisable to pay the due amount completely to avoid the finance charge. Almost all the banks charge you penalty in case of late payment.
Though credit cards can help you get immediate happiness as they give you the freedom to make quick purchases, you will end up damaging your credit score in case of defaults in payments. In case your credit score is not good enough, you may face difficulties in securing loans from banks and other private lenders as it would be difficult to prove credit worthiness in such situations. Even if the loan amount is sanctioned, it is quite possible that it would be lower than the amount you ask for. People with bad credit history would be charged a higher rate of interest as compared to that charged for those who have good repayment history.
It is a well know fact that the rate of interest charged on credit cards is much higher as compared to other kinds of loans. So, many financial experts suggest people to go in for a personal loan instead of a credit card. Till date, many people have found it difficult to resist the temptation of buying excessively with the use of a credit card which causes their debt to mount. So, all the best for your financial planning and do well!
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