For many people, the use of a credit card as a financial instrument, is met with some amount of apprehension. Justified or not, a lot of these apprehensions are borne out of a lack of an understanding and a complete appreciation of a credit card, how it differs from other cards and the benefits it has for users who use it appropriately and for the right purposes.
Ordinarily or even as a natural instinct, people would want to steer clear spending money they do not have and that is the sense in which a lot of us view credit cards. In actual fact, however, the use of a credit card can in many ways encourage responsible borrowing. How? Let us first learn a bit more about credit cards.
What is a Credit Card?
A credit card is a financial instrument that allows you to access a credit limit your bank gives you. A credit limit is just like a loan that you can use as and when you need and it is limited to the amount of credit limit given by your bank. The bank allows you to reuse the loan over and over as long as you keep paying the minimum instalment on a monthly basis. In very simple terms, a credit card gives you access to a predetermined short-term loan from your bank, which you pay back at a specific time agreed upon by you and your bank. This is different from a debit card also issued by your bank. But how?
How a Credit Card Differs from a Debit Card?
Credit cards and debit cards work in similar ways but are very different. First, when purchasing something with the debit card, the money comes directly from your bank account whereas in the case of a credit card, the purchase is charged to a line of credit for which you are billed later. Secondly, debits cards are not debt instruments because whenever you use a debit card to make a payment, you are just tapping into and withdrawing from your bank account. But credit cards are debt instruments. Meaning whenever you use a credit card for a transaction, you are borrowing money from the bank, which you are obligated to repay later.
Lastly, the use of a debit card requires that you have enough money in your bank account or an agreed overdraft to cover the transaction. A credit card, on the other hand, is not linked to your current account. It is a credit facility that allows you to buy things immediately, up to a pre-arranged limit and pay for it later, you then have a choice of paying off the bill in full by a set date with no interest or paying at least a minimum amount and spreading the repayments over a period of time.
So Why Do You Need a Credit Card?
Credit cards have lots of benefits for consumers when used appropriately and for the right purposes. A credit card is the safest and most flexible and save personal loan you could find. You choose how much you spend and borrow each month, as well as whether you repay the minimum amount (10% of outstanding balance) or whether you pay the full amount. Using a credit card is very convenient. Credit cards allows you to make purchases without drawing cash to pay for them.
The card is a very safe and convenient way to make a range of payments to suppliers, either for physical goods or services. And all these transactions carry no transaction fee, in fact they are free to you. This means that a credit card can be used as a safe and convenient payment method where the payments are free when used at merchants. And it is interest free too, if you pay the full outstanding balance each month.
One very interesting thing about a credit card is its inherent security covers and protections. Credit card companies are obligated to protect cardholders from fraudulent purchases especially online. When the purchase is made, the credit card company first verifies the website the purchase was made before authorizing payment. If the website is found to be fraudulent the credit card company will not go ahead with the payment thereby protecting the cardholder from fraud. In this way, you are able to pay for your online purchases with the assurance that the transactions are secure.
Finally, a good credit can build a credit score that enables you to get good rates for your purchases. A good credit is when you make purchases using a credit card and pay off within the pre-arranged time. When this is adhered to overtime, you sometimes get discounts on your purchases amongst others. The credit card market, especially in Africa, is an emerging one that needs a lot of education. Hopefully this article has been of help and will make you make an informed decision about a credit card.
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