Understanding Credit Cards

How it works

The banks or financial institutions give you some money (credit limit) that you can borrow from to fund expenses with the expectation that you would pay it back. When you don’t pay this money back, you get charged interest.

No, a credit card isn’t a bank card with free money.

How interest works

On your statement date, a balance of how much you owe is provided and you have a grace period (typically 21 days) to pay off the balance. Interest on the balance is already calculated in the system based on how much you owe by the statement date. However, the interest is on hold till the due date mentioned on your statement. If you pay up the full amount on your credit card statement by the due date, the interest falls off, if you don’t, the interest will be charged.

My credit card interest rate is high

Typically, your credit card interest rate (APR) is high compared to most credit facilities (line of credit, mortgages, etc). However, the credit card rate is usually for the entire year. So a 19.99% interest rate comes down to 1.6% monthly. That said, for every $1000 you owe and haven’t paid off, you are paying $10.60 worth of interest monthly. Not bad, huh? However, the interest compounds every month. You are probably wondering what this means. Say you owe $1000 in month 1 and have been charged $10.60 in interest, assuming you didn’t pay off the balance in month 2, your new debt is $1010.60 and interest would be charged on the $1010.60 ($16.67). And it keeps growing like that – you get charged interest on interest!

In addition to credit cards helping you build your credit, some credit cards come with amazing perks such as cash back, travel points, shopping vouchers and so much more. To maximize these benefits fully, avoid paying interest and increase your credit score, you have to use your credit card wisely.

Credit score: This is used to determine your credit risk, the higher your credit score is, the less risky a borrower you are.

Credit Card Tips

  1. If you don’t have it, don’t put it on your credit card.
  2. Pay off the balance in full not just the minimum balance by the statement.
  3. Use a card that has rewards (sometimes, a credit card with an annual fee might be more beneficial to you than a free card, only get one if the perks and benefits from the card outweigh the annual fee).
  4. Don’t use more than 30% of your credit limit. That is, if your credit is $1000, you don’t want to spend more than $300 on your card.

That’s it from me. I hope you enjoyed this post and learnt a thing or two from this post. For more finance tips, please subscribe to the blog so you don’t miss a new post! Also, follow me on instagram for more daily money conversations and tips!

Don’t forget to share with a friend and leave a comment on any other tips you know that could help! Look forward to hearing from you soon.

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