Once A Week Cape Town, South Africa | How Do Credit Cards Work?
Credit cards might assist when you need money for an emergency or cannot afford something you truly want or need. Nevertheless, credit is not and never will be free. Credit card costs include interest, service, and introductory fees.
Therefore, if you are in the market for a new credit card, you must first grasp how credit cards function and the many varieties accessible. Thus, you can effectively manage them and increase your credit score. The best place to begin is with the fundamentals explained here.
What exactly is a credit card?
A credit card grants access to the pre-approved credit given by the issuing bank. This implies that you will have sufficient funds to pay for items made on credit. The money must be repaid either in full at the end of the month or gradually via minimum monthly instalments.
How does it work?
Applying for a credit card is similar to applying for a loan or other kind of credit. Before approval, your bank will evaluate your credit history and capacity to pay. This is to determine whether you have a history of paying or not paying your creditors and if you can afford the necessary minimum payments.
The bank authorises a credit card limit when a credit card application is approved. This is the maximum available credit on your card. Your credit limit will be determined by criteria such as your income, existing debts, payment history, and the amount of available credit on other cards.
At the end of each month, you can pay either a monthly minimum or the whole sum. Monthly minimum payments are ultimately the most costly choice since they incur the greatest interest charges. Paying your balance in full each month gives you an interest-free grace period on your purchases.
What happens if you don't pay?
Your bank will record late payments to the credit bureaus if you fail to make payments on time. Your payment history comprises 35% of your credit score, which is a three-digit figure indicating the risk associated with lending you money. Monthly minimum payments must be made by the due date to prevent late penalties and possible credit score harm.
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