Personal Financing 101: Credit Cards

Personal financing is easier said than done. There are many ways to build your financial stability. This may include getting credit cards, and you may be enticed to get one because of credit card bonus offers and other benefits that come with it. If you’re unfamiliar with credit, you definitely have concerns about how credit cards operate. When you first begin using credit cards, there is a lot to learn, and ignorance might end up losing you money.

The fundamentals of credit cards are all covered in this introduction. You’ll discover all the details regarding how credit cards operate, how to pick the finest credit card for your needs, and a wealth of other information.

1. How do they work?

Using a credit card, you can borrow money from the company that issued it to purchase products and services. The amount you owe is called the balance. For example, a $100 purchase would result in a $100 rise in the balance on your card. You then return the borrowed funds in full or in equal monthly payments. You will also be charged interest if you don’t fully repay your debt.

You can use the credit card for purchases up to a specific limit. Your credit limit is set at this amount. For instance, if the credit limit on your card is $1,000, the debt cannot be higher. Your credit card company will provide a monthly statement that details your purchases.

2. Advantages of Credit Cards

The main reason why people get credit cards is to build their credit scores. Banks will depend on your credit score to see if you can pay them back on time. If your credit score is low, it will be hard for you to get new loans or credit cards. On the other hand, if you have a high credit score, you might get a higher credit limit and faster approvals.

Also, people find it more convenient to use credit cards than debit cards. For example, you must purchase today, but your money comes into your bank account in five days. A credit card can help you make the purchase and pay it later, as long as you pay the balance in time.

3. Disadvantages of Credit Cards

The nature of a credit card is debt because you borrow money from a bank. This creates a threat of debt that you can’t pay back. Since credit cards let you spend more than your budget allows, you can end up paying a lot of interest while not making much progress on paying off your debt. For example, if you make $4,000 a month and spend $3,000 a month, you have $1,000 to save. With a $6,000 card limit, you can use $6,000 that you couldn’t save up for at least six months.

Don’t forget that credit cards also collect fees and interest. Depending on the interest rate on your credit card and how you use it, it can cost you hundreds of dollars in a year. If you know how compound interest works and when your billing period is, you can plan your payments so you don’t get late fees or your balance goes up. If you pay late, you’ll have to pay fees. Fees quickly add up, and they get added to your balance. This means that you will also be charged interest on your fees.

Conclusion

It’s easy to enter into credit card debt and hard to get out of it. All of this can be avoided if you don’t charge more than you can pay back and if you pay on time. Also, rewards cards can help you get more for your money when you travel or give you cash back on purchases. They also provide people with some protections and benefits that cash doesn’t. 

Credit cards can help you build a good credit score if you pay on time and keep your balance low. Having a good credit score can get you loans that you might need. However, credit cards can make you want to spend more than you have, and they don’t give you the same kind of feedback that an empty wallet or low bank balance does. If you know yourself, you’ll be able to determine if a credit card is right for you.