A credit card is a plastic card that gives the cardholder several credit card benefits including a line of credit with which to make purchases or withdraw cash. You can use the card to purchase goods from merchants that accept the cards. As the cardholder, you will need to repay the debt per the agreement with the card issuer.
Credit cards are issued by banks, credit unions, and other financial institutions. To get a credit card, you will need to fill out an application and be approved by the issuer. Once you have been approved, you will be given a credit limit and an interest rate.
To use a credit card, you will need a credit card reader or a point-of-sale terminal. If you want to buy items online, you will need to know your credit card number, the expiration date, and the security code. When you make a purchase, you will need to provide your signature or the card PIN.
What is a Credit Card?
A credit card is a type of financial instrument that allows individuals to borrow money and make purchases on credit. Credit cards are issued by financial institutions and can be used anywhere credit is accepted. When used responsibly, credit cards can be a helpful tool for managing finances and building credit.
However, credit cards can also be a source of financial stress if used irresponsibly. It is important to understand how credit cards work before using one so that you can avoid debt and manage your finances responsibly.
Things You Need to Know About Credit Cards
Credit cards can be a great financial tool if used responsibly. They can help you build credit, earn rewards, and improve your financial standing. However, credit cards can also be detrimental to your financial health if not used carefully. It’s important to understand how credit cards work before using them.
Here are some things you need to know about credit cards:
Credit card limit
The credit limit is the maximum amount of money you can borrow on your credit card. Your credit limit is determined by the credit card issuer based on factors such as your credit history, income, and creditworthiness.
Every month, you will receive a credit card statement with the minimum amount you need to pay. While paying the minimum will help you avoid paying late fees, you may end up accruing high-interest charges over time. To avoid interest accruing, pay your credit card balance in full to avoid interest charges.
Cash withdrawal cost money.
When you make withdraw cash from your credit card, you will incur a fee. The fee is usually a percentage of the total amount you withdraw, so it can be quite costly if you withdraw a large amount of cash. Therefore, it is best to only use your credit card to withdraw cash if you need the money and cannot find another way to get it.
Billing cycle and due date
Credit cards have regular billing cycles, mostly monthly. This will include transactions, outstanding balances, minimum payments, and the due date when you are expected to make payments.
A credit card is a type of loan.
When you use a credit card, you are borrowing money from the credit card company. You will then have to pay back the money you borrowed, plus interest and fees. It’s easy to think of a credit card as an extension of your wallet, but you should remember that the money you spend on it is a loan.
Use the card responsibly; it will help build your credit history and improve your financial standing. But when misused, they can result in late payments, high-interest rates, and even bankruptcy.
You will be charged interest on the balance on your credit card.
If you carry a balance on your credit card from month to month, you will be charged interest on that balance. The interest rate that you are charged depends on several factors, including the type of credit card you have and the prime rate.
The best way to avoid paying interest on your credit card balance is to pay off your entire balance each month. If you can’t do that, try to keep your balance below 30% of your credit limit. This will help keep your interest charges to a minimum.
You can only spend what you have available on your credit limit.
You can only spend the available credit limit. This means that you need to be aware of your credit limit and make sure you don’t go over it. Otherwise, you will be subject to fees and penalties. You can find your credit limit on your credit card statement or by contacting your credit card issuer.
When using your credit card, make sure you leave space for fees. In case you spend your full credit limit and the card issuer adds their fees, and this makes your card go over the credit limit, they will charge you for it. For example, if your limit is KSh 100,000, avoid using up all the limit. The card issuer will add fees, and your card will be over the credit limit. You will be charged for this. Make sure to stay within your credit limit even when fees are added to the account.
You can see the credit card charges before you apply for them.
Before you sign up for a credit card, it’s important to check the fees they charge. Most credit cards will list the fees they charge in their cardholder agreement, which you should review before you apply for a card.
Some of the most common fees include.
- Annual fees
This is charged annually.
- Cash advance fees
When you borrow money from your credit card, you get charged cash advance fees.
- late payment fees.
This is a charge you incur if you fail to pay the minimum debt on your credit card at the end of the month.
- Foreign transaction fees
If you use your card to make purchases outside the country.
- Annual percentage rates (APR)
Annualized interest rate (APR) is the amount you pay on balances you carry from month to month.
Be sure to compare these fees before you choose a credit card so you can avoid paying more than you must.
Credit card fees can be avoided.
You can avoid most of the credit card fees. Here is how to avoid them.
How to avoid foreign transaction fees
Most credit card companies charge a fee for foreign transactions, but there are ways to avoid these fees. Here are a few tips:
- Use a credit card that doesn’t charge foreign transaction fees. There are a few cards out there that don’t charge these fees, so do your research and find one that fits your needs.
- Use a debit card instead of a credit card. Debit cards don’t usually have foreign transaction fees, so this is a good option if you don’t want to pay the fee.
- Get a travel card. There are a few different travel cards that don’t charge foreign transaction fees. These cards can be a good option if you travel often or if you want to avoid paying the fee.
- Late payment fees
Always pay your credit card debt on time.
- Over the limit
Avoid going over the limit. It’s advisable to keep the limit at 30%.
- Annual percentage rates
You can avoid paying the annual percentage rate by paying off all the debt on your credit card. Avoid carrying over any debt to the following month.
- Cash advances and cash transfers
Avoid cash transfers and cash advance transactions to avoid incurring these costs.
It’s possible to avoid paying the interest.
If you have a credit card, you may be wondering if there’s a way to avoid paying interest on your balance. After all, interest can add up quickly and make it difficult to pay off your debt.
You can avoid paying interest if you pay your balance in full every month. Also, look for a credit card with a 0% intro APR offer. Of course, the best way to avoid paying interest on your credit card is to not use it at all. If you can pay for your purchases with cash or a debit card, you’ll never have to worry about interest charges.
Rewards and benefits
Many credit cards offer rewards programs, such as cashback, points, or airline miles, based on your spending. Additionally, credit cards may provide credit card benefits like travel insurance, purchase protection, extended warranties, or access to airport lounges. Familiarize yourself with the specific rewards and benefits offered by your credit card.
Credit cards come with security features like chip technology, PINs, and fraud protection to safeguard against unauthorized transactions. Be aware of the security measures provided by your credit card issuer and take appropriate precautions to protect your card information.
Terms and conditions
It’s important to read and understand the terms and conditions of your credit card agreement. The agreement contains crucial information about fees, interest rates, dispute resolution, and other relevant information.
Late payments damage your credit rating.
If you are carrying a balance on your credit card and making late payments, you are damaging your credit rating. That’s because late payments are one of the most important factors in your credit score. So, if you’re looking to improve your credit score, make your payments on time.
Types of Credit Cards
There are many different types of credit cards on the market. Here is a quick rundown of the most popular types of credit cards:
- Cash-back credit cards: These cards give you a certain percentage of cash back on all of your purchases.
- Branded version credit cards: These are issued by national retailers to increase brand loyalty.
- Balance transfer credit cards: These cards allow you to transfer your balance from one credit card to another, usually at a lower interest rate.
- Rewards credit cards: These cards give you points or miles for every purchase you make, which you can then redeem for travel, merchandise, or cash back.
- Business credit cards: These cards are designed for business owners and offer many features, such as business expense tracking and employee cards.
- Secured credit card: These cards require a cash deposit as security.
- Unsecured credit cards: unlike secured credit cards, they don’t require a deposit and tend to offer higher lines of credit.
What are the Credit Cards benefits?
There are several credit cards benefits when used responsibly. Here are the main credit cards benefits.
Credit cards provide a convenient payment method that allows you to make purchases in-store, online, or over the phone without the need for cash. They offer a widely accepted form of payment globally, making transactions more accessible and efficient.
Help you build a credit history.
Responsible use of a credit card can help establish and build a positive credit history. By making timely payments and keeping your credit utilization low, you can demonstrate your creditworthiness. This is important when applying for loans, mortgages, or other lines of credit in the future.
Rewards and perks
Many credit cards offer rewards programs that allow you to earn points, cash back, or airline miles based on your spending. These rewards can be redeemed for various benefits, such as travel discounts, merchandise, gift cards, or statement credits, providing added value for your purchases.
Credit cards offer a layer of security compared to cash or debit cards. In the case of unauthorized transactions or fraud, you have legal protections under consumer protection laws. Additionally, credit cards allow you to monitor your transactions easily, and some issuers provide real-time alerts for suspicious activity, enhancing security and fraud prevention.
Access to credit during emergencies
Credit cards can provide a financial safety net during emergencies or unexpected expenses. Having an available line of credit allows you to cover immediate needs and pay them off over time, providing flexibility and peace of mind.
Budgeting and expense tracking
Credit card statements provide a detailed record of your expenses, making it easier to track your spending and manage your budget. Some credit card issuers offer expense categorization tools or spending insights, helping you gain better control of your finances.
You don’t have to carry cash.
While it’s always a good idea to have some cash on hand in case of an emergency, you don’t always need to carry around a lot of cash if you have a credit card. Credit cards are accepted at most places these days, and they offer a lot of protections that cash doesn’t. For example, if you have a credit card and you lose your wallet, you can usually cancel the card and get a new one. With cash, you’re out of luck.
Do credit cards have fixed or variable annual percentage rates (APRs)?
Credit cards typically have variable annual percentage rates (APRs). A variable APR means that the interest rate can fluctuate over time based on changes in an underlying benchmark, such as the prime rate or the U.S. Federal Reserve’s interest rate. These benchmark rates are influenced by various economic factors, including market conditions and monetary policy.
The variable annualized interest rate is expressed as a margin added to the benchmark rate. For example, a credit card may have an APR of “prime rate + 10%,” which means the interest rate will be the prime rate plus an additional 10%. As the benchmark rate changes, the APR will adjust accordingly.
It’s important to note that credit card issuers typically have the discretion to adjust the APR based on their policies, even if there are no changes in the underlying benchmark rate. This can happen due to factors such as your creditworthiness, payment history, or changes in the issuer’s overall risk profile.
However, some credit cards may offer promotional or introductory APRs that are fixed for a specific period. These fixed rates are often lower than the standard variable APR and may apply to balance transfers, purchases, or both. After the promotional period ends, the APR will revert to the variable rate.
It’s crucial to review the terms and conditions of a credit card agreement to understand the specific APR structure, including any introductory or promotional rates, and how the variable APR may change over time.
Which credit card should I apply for?
There are many factors to consider when choosing a credit card, such as the annual fee, interest rate, and rewards program. Compare different cards to see which one fits your needs the best. Keep in mind that some cards require good or excellent credit for approval. If you’re not sure which card to apply for, you can check out our list of the best credit cards.
How Can I Use My Credit Card Responsibly?
Credit cards can be a great tool to help you build your credit history and improve your financial standing. However, it’s important to use them responsibly. Here are a few tips to help you use credit cards responsibly:
- Only charge what you can afford to pay back.
- Pay your bill in full and on time each month.
- Limit the number of credit cards you have.
- Keep your credit card balances low.
- Avoid using your credit card for cash advances.
While credit cards can be a helpful tool, it is important to choose the right one for your needs. There are a lot of different factors that go into finding the best credit card, and a financial advisor can help you figure out what is best for you.