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Credit Cards 101 - all you need to know about credit cards!

By Alet Viegas

Credit Cards 101 - all you need to know about credit cards!

What is a credit card?
A credit card is in effect a piece of plastic similar to that of a debit or ABM card which allows you the flexibility to shop without walking around with a bundle of cash. You may use a credit card for any application from paying the grocery bill to paying the medical bills.

What is the difference between a credit card and a debit card?
Debit cards are pre-paid cards. This means that the value of the debit card is equivalent to the value of cash within the account-holder's account. In effect therefore, a person shopping with a debit card is shopping with his own money.

A credit card on the other hand is the opposite - the holder of a credit card does not shop with his/ her own money but rather with an advance (so-to-speak) from an approved financial institution. This advance usually has a limit so that the bearer of the card may only spend how much the financial institution allows him/ her to spend. The option of whether or not the entire advance is utilized by the card bearer is up to him/ her alone.

Note that not everyone can 'get' a credit card - the individual must be formerly accessed and approved by the financial institution before the card is issued. This is because in effect the credit card is an unsecured contract similar to a loan between the applicant and the financial institution.

How does the credit card work?
A credit card however is not 'free money' given to the bearer by the bank. This advance must be paid off over a period of time specified also by the financial institution. The card bearer in turn has the option to clear his balance in full at any time or to pay small amounts over a regular period for a stipulated time period. The latter however is always subject to interest charges, and missed payments accumulate penalty charges. Like a loan, this premium is to be specified by the financial institution upon approval/ release of the card.

Credit cards are generally issued by banks only after you meet the stipulated criteria for approval/ selection.

Once the credit card limit has been reached, the card bearer is not allowed to spend any more money on any additional purchases - all further transactions will be rejected by the financial institution. Only when the limit has been cleared will the card bearer be allowed to access funds again - note that the entire limit does not have to be paid off entirely but at least the monthly instalment/ premium must be paid. In this case, the amount cleared is the available spending balance to the card bearer.

Who qualifies for a credit card?
Having understood now what the credit card is and how it works, I am sure that the very next question you will be asking is "Can I get a credit card?"

The answer to that question is not a simple 'yes' or a 'no', it comes only after a series of other questions have been raised. The more definitive question is "Do I qualify for a credit card?"

Again the qualification factors for a credit card, like a loan, may vary from financial institution to financial institution. Dependant factors include, among others, the following:

Your previous financial/ credit history;
Your current financial status;
Your current stability status.

Basically these answers would give an insight into the risks associated with allotting you an advance. If the risks associated with the transaction a low (i.e., if you have a good credit history with good job security and a secured savings account) then approval would be almost guaranteed in a timely manner. If however you have defaulted on previous loans or have a bad history of on-time and in-full payments to individuals, companies or firms, then the risks associated with allowing you an unsecured balance are quite high (i.e., the possibility that you might default on this transaction too exists).

Different types of credit cards do exist however which allow even those individuals with high risks associated with their borrowing options to qualify for a credit card. Additionally, different cards meet different needs of the marketplace so that an individual may now choose his credit card specific to his own purposes.

What type of credit cards can I choose from?
There are a multitude of available credit card types that you may choose from when selecting a credit card. Each type is adapted for a specific need. Some of the types of credit cards that you may choose to opt for are described below.

Standard or regular type credit cards - these are the most common of all types of credit cards. The bearers of such cards are usually low-risk individuals who can benefit from low interest charges among other standard features.
Reward type credit cards - these may include such features, which you can benefit from every time, that you use your credit card. Some of the typical credit card features include bonus mile coverage, health care discounts, point accumulation for the redemption of specific rewards, etc.
Secured credit cards - especially for those with bad credit histories or other individuals who may not have otherwise qualified for a credit card. This card functions the same way as any other card (i.e., via an advance approval), but as with any risky loan approval a collateral is needed to insure the 'loan', i.e., reduce the risk associated with the transaction.
Corporate credit cards - special credit cards exist for business owners who may have different demands entirely. These cards are beneficial to the business owner because it allows him to clearly differentiate between the expenses of his company and those of his family.

How to apply for a credit card?
One can apply for a credit card at most any financial institution as long as they offer the facility. Simply collect the form, fill in the details and follow instructions for submission.

Alternatively however one may choose to apply for a credit card online. This is very convenient to many persons as it saves them all of the hassles associated with getting to a financial institution (including traffic and travelling expense) as well as the hassles of standing in lines and wasting time trying to see the relevant persons.

Most reputable online credit card applications can be found at the very website of the company. Usually these are the equivalent of the hard copy formats, the only difference is that you type in the information and hit the submit button at the bottom of the page.

Other forms of credit card applications do exist though. Some of these are even generic in nature so that the type of credit card that best suit your needs are instantly determined by the answers that you generate to well-formulated but simple questions. Some however may feel insecure about giving out such personal information and may choose to do their own research for suitable credit card types themselves.

Be sure however to ensure that regardless of where you choose to apply for your card is safe and secure and most convenient to you.

What are the benefits of the credit card?
The generic benefits of the credit card have already been discussed above - it allows you the freedom to shop without the worry of carrying large amounts of cash with you, it gives you peace of mind knowing that you have ready access to funds without having to take from your own pocket, and it offers the security that anyone robbing you will only get a piece of unusable plastic.

Other benefits of credit cards come in the types of credit card that you may choose itself. For example, a rewards type credit card affords you accumulated bonus points that you may use separately while student cards afford the school individual to start early credit relations without even a steady form of salary coming in.

Published: Wednesday 10th of September 2008 10:12:58 AM

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