What is a credit card?
A credit card works just like a bank card, but instead of spending money you already have in your account, the funds are loaned to you as you use the card. For most cards, as long as you pay them off in full each month, no interest is owed. This means you can effectively take advantage of an interest free loan every month – to a maximum of your card’s spending limit. Spending limits usually start quite low, depending on your income, but can be built up over time to substantial levels.
Be careful though, if you don’t pay the balance off each month, interest rates will be applied. Interest rates for credit cards are usually quite high, but they can be useful in helping to establish credit ratings, or for smoothing out a budget over the course of each month.
How do credit cards work?
You can use the card just as you would a bank card. You can borrow money up to the top of your spending limit. The credit card company will list each transaction on your statement, and total it for you – this is not only a way to detect and prevent fraud against you, but is also a handy budgeting tool. You can pay your balance off in full each month, in which case you won’t pay interest, or you can make a minimum payment and carry a balance. Minimum payments are quite low, and paying a balance off at the minimum rate will take a long time – and be very expensive.
Rewards credit cards
Some credit cards offer rewards, such as cash back, air-miles programs, or special rates in specified shops. Taking full advantage of these deals can save you a lot, if you choose the right one.
Switch balance on credit cards
If you owe money on a credit card, and are paying a high rate of interest, it may be possible to move the balance owing to a card that offers you 0% interest for a fixed period of time. You continue to make payments, but the full amount of money paid each month goes directly to paying off the principle amount. Switching to a 0% card often comes with a fee.
Improve your credit rating
Using a credit card responsibly is a great way to build up or repair your credit rating. It shows regular responsibility in repaying credit. Be careful though, too many credit cards – even with little or no balance owing – can actually harm your chances of getting a loan.
Credit card comparison
Make sure to shop around when looking for a credit card. The deals are changing on an almost weekly basis, so using a site like Compare to Save can save you a lot of money over the term of a new credit card. Be savvy, compare to save!
Pros and Cons of Credit Cards
Credit cards can help you budget through the month by making small amounts of credit available as you need them, and putting all of your transactions in a handy list each month. They can also help to build your credit rating.
Be careful though, interest rates can quickly push debt out of control, and have the opposite effects, making budgets tighter and damaging credit ratings.