Simply put, a credit card is an upfront loan from a bank or other financial institution that allows you to spend the allotted money and then repay it either over a period, or all at once. For a fee, of course. And interest, of course. And penalties, of course. And other charges, of course.
Credit Cards are neither inherently good nor bad, like most things in life. They are a tool, and the usefulness of a tool is in how you use it, and how you take care of it.
Many people will decry the credit card and declare it to be a monstrosity that enslaves the humble consumer to the evil bank overlords. But the people who say these things usually have poor debt management habits, or do not understand the product they signed up for, or have been incredibly unfortunate, or a combination of these.
The ins and outs of the credit card industry vary slightly, depending on your circumstances and where you are in the world, and this is by no means a definitive authority on the subject, but there are plenty of commonalities, no matter where you live.
As much as we all love to say we want to pay for things cash, this is not always possible, and at some point in your life you are likely to need a loan for something or another, such as to buy a home or vehicle, to pay for tuition or to have some capital to start a business. The larger the loan, the more the financial institution weighs the risk of loaning the money to you.
A credit card is one of the easiest loans to get. In some parts of the world they literally mail them to you without you even asking. And an easy, well managed loan makes you much more attractive to a financial institution if you want a larger one.
There are several advantages to having a credit card, and to running it wisely, for both individuals and businesses:
You improve your credit score.
This makes you look good for future loans at competitive rates. Even using your credit card just for small amounts such as streaming services, and then paying it timeously makes you look good.
You can use them to make online purchases.
This widens your range of choices in purchasing, not just in your own country but globally.
They may work all over the world.
They are great for traveling as you do not need to exchange and carry as much cash money. Plus your credit card may have great travel insurance programs.
They may have lucrative rewards programs.
These can include discounts, redeemable points or even cash back options, but check the fine print.
They have security measures that cash does not.
Not only do they usually have some sort of authentication method such as PINs, if your card is lost or stolen you can cancel it, hopefully before your account is drained.
There are a few tricks to running a successful credit card account, here are just a few ideas –
Understand it’s not free money.
It’s a loan. You have to pay it back, with interest. And other fees. If you have problems with compulsive spending you will need to apply some discipline to your credit card habits. Spend wisely within the limits of what you can comfortably repay on a regular basis.
Know what you are paying.
Read the terms and conditions, read your credit card statements. Understand exactly what you have to pay in fees and charges, over and above the repayment and the interest on the repayment. Sometimes an insurance plan on your card may be taken as an annual payment as opposed to monthly. If this is the case be aware of it and plan for it.
Never miss a payment, or be late.
Not only will you wind up paying a huge penalty fee, but you will also make a dent in your credit score. If you are going to have problems with making a payment, communicate with the financial institution beforehand. Frequently they will be able to offer you options on your repayments. For a fee, of course – make sure you know exactly what that is going to be as well.
Settle in full monthly, if you can.
Financial institutions give more positive weight to people who settle in full each month than those who just pay the minimum monthly repayment. If you are unable to do that, consider paying more than the minimum.
Find out when the interest is calculated.
The financial institution calculates the interest on what you owe every month at the same time, then they ask you for payment. Frequently you can save a little money by paying into your credit card before the interest is calculated, that way the interest is calculated on a lower amount. Depending on the size of your credit card debt it might not seem like it’s making much difference on a month to month basis, but over a year or two it certainly adds up.
Don’t sign up for reward schemes if they are not worth it.
Some reward schemes have fees. Don’t sign up for one of these if the amount or value you actively gain from it does not out-weigh the fee. Reward schemes can be very obtuse and difficult to understand, especially if they work on a tier basis. Read the fine print and do some basic math.
As a business, it is very advantageous to be able to accept credit cards as a form of payment. Benefits include widening your customer base, both in person and online, as well as the fact that the financial institution carries the risk of the purchaser defaulting on their loan, not you.
But as a business it is not alway easy to get access to facilities to accept credit card payments online. And it can be prohibitively expensive, especially for a small or new enterprise. At Baer’s Crest we have helped countless businesses realize their dream of accepting payments online, even if they may have previously been rejected by other organizations. Talk to us and find out more about our products and services.