A credit card, also known as a charge card, is a plastic payment card issued by a bank to consumers to enable the card holder to pay to a retailer for products and services according to the cardholder’s accumulated debt. Credit cards come in two categories: credit and debit. Credit cards are often used as substitutes for cash, with the added benefit of never incurring debt. Because most credit cards carry an annual fee, it is important that you make your monthly payments on time so that you do not incur high late payment penalties.
Many people can find themselves struggling with their credit card debt because of the high interest rates associated with credit cards. Interest rates of up to twenty per cent are charged on purchases and ATM transactions and sometimes even higher. Also, the APR or annual percentage rate can double, triple or more once unpaid balances begin to accumulate. Credit cards come with a wide variety of terms, including fees and grace periods for missed or late payments, but APR rates are usually the biggest determining factor for using a credit card.
Most consumers prefer to use cash instead of credit cards because it allows them to spend more, carry larger balances and pay off the debt quickly. However, credit cards give cardholders a great deal of flexibility, especially when it comes to borrowing funds from banks or other financial institutions. If cardholders fail to repay the full amount borrowed, they may be liable for legal action, including possible jail sentences for defaulters. In addition, financial institutions may repossess personal property owned by cardholders, such as a car, house or other valuable property, if the repayments on a credit card are not made on time. If you fall behind on your payments, a bank will often repossess a significant portion of its investment, which could result in your being forced to leave the property or suffer other consequences.
Credit cards are useful because they offer low-interest rates, which make it easy to buy things that may otherwise be out of your financial reach. When used appropriately, they can also provide significant benefits. For example, a bill payment card may be useful in situations where the bill has a late fee or is due within a short period of time. If the bill payment is made on time, the interest charges will usually be minimal and you will be able to pay the balance before the grace period expires. This enables you to keep the minimum monthly payment in good standing while still being able to pay down the debt. A credit card also makes sense if you want to be able to make purchases on a major credit or store card, such as an airline card, a department store card or a charge card.
Credit cards can also be useful if you need to be able to make a large purchase without waiting until your balance is low enough or if you want to buy something that will require an initial payment, but you plan to pay it off over time. If you choose a credit card with an interest-only payment option, you will pay more interest during the period in which you have the debt because you are paying less interest at the start. If you use your credit limit often, however, you can use it to pay for things you would not otherwise be able to do without a loan or credit card. Credit cards also allow you to pay your balances off in a specified period of time, which may give you an opportunity to rebuild your credit limit.
Finally, credit cards give account holders an opportunity to build a history and establish their credit rating by using their cards wisely. They are used to spending, and thus a responsible use of a card allows them to begin building a history as a responsible account holder. As you prove yourself to be a responsible account holder, you will find it easier to obtain loans and other types of credit, at better interest rates and more affordable terms. In addition, if your balance goes down a lot, you will find that interest rates will drop, giving you more room to pay your balance.