Numerous articles are written daily about managing credit cards, but few share enough information on becoming debt-free. Financial freedom has become a leading desire worldwide, especially in the USA, where there are more than US$1.2 trillion in unsecured debts.
What Are Credit Cards?
Credit cards are unsecured loans issued by bankers to stimulate spending and facilitate more manageable and safer shopping. They differ in value, brands, and perks. Card limits are established by the credit score or the bank’s evaluation criteria of the receiver.
There are four major card brands: VISA, MasterCard, Diners, and American Express. Other well-known cards include the JCB and Maestro.
Credit cards are generally made of thin rectangular plastic or metal and issued by a bank or financial services institution. The institution enables cardholders to borrow money to acquire goods and services.
Most merchants prefer to accept cards rather than cash, which gives buyers confidence that they can shop without needing money.
A credit card differs from a debit card because it requires a third-party guarantee of the purchases and pays the seller. The buyer later pays the company these funds.
Why Do Banks Issue Credit cards?
Banks survive by renting their money for an agreed-upon sum, usually an established percentage, over a given period, usually a year.
Banks can create credit card loans more quickly than personal loans. Except for secured cards, these loans require cardholders to repay the loans, interest, and additional contract charges.
Banks use credit cards to make money; they are unsecured loans, and these institutions make money from the following means:
1-Annual Fees
Financial institutions charge an annual fee for each car they issue. The cost varies depending on the issuing company, the size of the loan (credit limit), and the card brand.
2-Late Fees
According to US law, financial institutions must provide a grace period of at least 21 days before they can charge interest on the amount spent. Please note that you are only responsible for the amount paid, not the card limit.
3-Interest on Unpaid Balances
This is the second highest earner for banks from credit card loans. Whenever used funds go over the due date, financial services begin to charge interest. The longer the funds remain unpaid, the more interest it will accumulate.
4-Percentage of Purchases via Merchant Portals
Another way banks make money is by deducting a percentage of the sales price from merchants to process the transaction. When you use your credit card to pay, your bank charges the merchant a processing fee. Merchants are now increasing their prices to cover these charges.
5-Cash Advance Interest and Fees
Financial services may not mention this, but they charge a higher interest rate on cash advances, and the interest is automatic from the day of the withdrawal. Cash advances also vary by a small fee for the processor.
According to the FDA, the total number of global credit cards (June 2018) was 7.753 billion. Another report showed that in 2020 there were more than 1.09 billion credit cards in the US, and 72.5% of adults (187.3 million) had at least one credit card.
How Do Credit Cards Transform into Debts?
Bad credit health, or a negative credit score, didn’t just happen. It was created by some habits that we did not pay details to. Here is why small loans, like credit cards, can rapidly become debts.
- Your payment plan involves paying the minimum. Banks do not tell you that you are incurring high interest rates by paying the minimum. The minimum payment includes a small part of the credit line plus interest.
- Having too many cards will increase your monthly payments. Remember that credit cards are personal loans, and you must repay them. Each card carries a different interest rate, even from the same bank. Try to borrow below your income range.
- Failing to pay on time will incur more interest and may even damage your credit rating, affecting your chances of getting future loans.
- Taking cash advance: Cash advances incur interest when you withdraw it. Banks charge higher interest on cash advances than on regular purchases, which have up to 21[1] days to pay off with o% interest. Cash advances also have hidden fees; the standard is 3% or a minimum of $10, meaning if you withdraw $100, fees are $10, or on a $1000, fees are 30. (For more information on what constitutes a cash advance? Please see the FAQ below)
How to Manage Your Credit Cards and Become Debt-Free?
The first step is to build a good credit history. This means paying your card bill on time, which is very beneficial because you will not be charged interest.
Since credit card issuing institutions report payments and purchasing activity to the major credit agencies, cardholders who manage their cards will establish high credit scores and extend their lines of credit.
No debts are created when users are disciplined in making timely payments and avoiding overdue payments. Most debt occurs when clients fail to treat credit cards as recurring loans. If a debt is paid today, it will be there tomorrow again.
Use your card for shopping. Instead of buying goods or services with your earned cash, pay off your credit card and shop with it. Avoid cash advances in all of its states since you incur interest immediately.
If you can practice some of these tips, you will learn how to manage your credit cards and become debt-free.
FAQs
Question: What do banks classify as cash advances?
Answer: Financial services consider these payments as cash advances.
- Mortgage Payment
- Utility bills
- Buying travel vouchers
- Travel money or travelers’ checks
- Betting and casinos, including lottery
Question: What is a line of credit?
Answer: A line of credit is a purchasing value extended to a client, allowing purchases without the client having to use their money.
Question: What are the types of credit cards available?
Answer
- Secured credit card: Users must deposit in a fixed account to secure the card’s limit.
- Prepaid debit card: Like a secure credit card, except it is renewable unless specified.
- Unsecured credit cards are the most used cards. They do not require deposits and are based on credit score criteria.
Views: 1