Credit Cards – Basics

14Jun10

Credit cards are the card issued by a bank authorizing the holder to buy goods or services on credit. These are also called Charge cards. They are extensively used all over the world and became a part of our lives. Some people say that there might be a cashless economy in the future due to these credit cards. Understanding the basics of credits will help us to handle the cards more efficiently.

A credit card is nothing but a type of loan, called as revolving credit in banking terms. Every credit card has a ‘credit limit’ that is the maximum amount up to which the card holder can spend money. After you have used up your limit you cannot use the card further till you have paid back some of the credit amount. Credit limit is calculated on the basis of the credentials of the card holder, i.e. his monthly income, his profession etc. which are the indicators of his ability to pay back.

Say for instance, if your credit limit is Rs. 25,000 then you can use your card to purchase up to Rs. 25000.Now if you pay back Rs. 10,000 of the Rs.25,000 then you can further purchase for Rs. 10,000 using your credit card but not more than that. At any point in time you will not be allowed to avail credit more than your credit limit. Also unlike other loans, banks do not have any collateral in credit cards, so banks have to be prompt and careful while issuing a credit card to anyone.

A person’s credit report is a record of their credit history.The credit report will tell if a person makes payments on time or not.It will tell about the types of accounts a persons has and their credit limits. It will also show who has been looking at the person credit. All of these things factor into what is called a credit score. The credit score is a huge factor in lenders and decides if a person is credit worthy or not.

Most people do not think of the terms and conditions of their credit. Except for interest rates, most people do not understand about the fees and penalties they can be charged. This can be a huge mistake. Understanding these things and taking time to figure them out is a part of credit finance. The key to credit finance is taking credit seriously and being responsible with it.

Credit is very useful and a good thing that people needs, but it may be very bad too, if not managed properly. So just be careful while you make your purchases.

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