Credit cards work on a simple principle—every time you use your card, you’re borrowing money to pay for something, and are required to pay back this borrowed amount. If you delay repaying the amount instead of paying the full amount when your credit card statement arrives, you’re charged interest.
How A Credit Card Transaction Works
A credit card transaction typically comprises four steps:
– You Swipe Your Card: Once you’ve decided what to purchase, you run your credit card through a card reader at the cash register, or if you’re online, enter your card information on the checkout page.
– Your Card Company Authorizes The Payment: The card reader contacts your credit card company regarding the validity of the card for the purchase amount. If everything is alright, the transaction is authorized.
– The Merchant Receives The Payment: The bank that issued your credit card sends the required funds to the merchant where the transaction was made.
– You Pay: The transaction is added to your credit card statement, and you repay your card issuer for the purchase.
Types Of Credit Cards
Based on different consumer needs, credit card companies offer different types of cards, including:
– Balance Transfer Credit Cards: These cards let you shift your debt from a high-interest card to a new one, and give you another year or more at 0% interest to clear the debt.
– Rewards Credit Cards: These cards, in a way, give you back a portion of what you spend by offering points, cash, or miles. These types of cards include general travel credit cards, cash-back credit cards, hotel credit cards, and airline credit cards.
Other types of cards include small business credit cards, low-interest and 0% credit cards, credit cards for building credit, and college student credit cards.
How To Choose A Credit Card
– Check Your Credit: The general rule is that the higher your credit score is, the more likely you are eligible for the best cards.
– Choose A Broad Card Type: To build your credit, get a card designed to mend or build credit. Otherwise, pick a card that gives you rewards for your spending or one that helps you avoid interest.
– Shortlist Your Choices: Consider aspects like if you need to do a balance transfer, whether you’re looking to save interest, and the like.
– Apply For A Card: Apply for a card best suited to your needs.
