What is a credit card?

In Credit by CreatingWealthYoung0 Comments

Credit cards have replaced paper money and offer a range of benefits/ rewards. While their convenience and ease of use are great, it’s important to understand what a credit card is and how they work. Here’s a quick overview on credit cards and some of the things you should know or might have questions about.

What is a credit card?

  • In short, it’s a revolving credit product with a set limit. Revolving in this context means you do not have to reapply for the credit limit once you’ve been approved. For example, I was approved for my first credit card with a limit of $500. I could spend up to $500 on my credit card and as long as I paid it off each time I would have the $500 limit always available. The only time I would have to re-apply would be if I was seeking a higher limit above the $500.
  • Another way to view a credit card is to simply think of it as a short term loan that’s always available to you. Upon using the loan you are required to pay back the balance within a certain number of days and if you fail to the entire balance is charged an annual interest rate.

How do I get a credit card?

  • The most common way to get a credit card is from a major financial institution. The bank will complete a credit application to determine if you qualify for the credit card you are applying for. It’s important to note not all credit cards have the same requirements. Some credit cards have a minimum income requirement while others are geared towards a specific target segment, which is the case for student credit cards.
  • Some tips on how to ensure your application is successful. First, review the credit card you plan to apply for online and find out what the income requirement is. If you do not meet the income requirement look at other cards and equally be skeptical of getting approved for a credit card that you do not have the income requirement for. Review the 5Cs of credit  and also ensure your TDSR is below 45%. Never apply for a credit product or get a credit product when you have no source of income.
  • While it’s possible to also get retail credit cards from Walmart or The Bay you want to stay away from these type of cards if its your first credit card as they usually carry a higher annual interest rate than bank credit cards.

Are credit cards free?

  • That’s a loaded question. Here’s what you need to know. All credit cards carry an annual interest rate. The rate can vary but for most bank credit cards the annual interest rate is 19.99%, while retail credit cards can have much higher annual interest rate.  In addition to the annual interest rate, some credit cards also have an annual membership fee. The membership fees can vary from card to card. So no, there is no free credit card.

What is the interest grace period?

  • Most credit cards will provide an interest free grace period. It’s typically around 21 days depending on your card. Purchases made within the 21 days grace period and paid back in full will not be charged any interest. If you are unable to pay the entire balance off, you will be charged interest on the portion you are unable to pay off.

What If I can’t pay back my entire purchases when I get my bill?

  • If you’re unable to pay the entire balance off, you should at least pay the minimum payment that’s required in order to maintain a good credit rating. But a word of caution here. Avoid paying just the minimum balance at all cost. Pay off as much as you can afford because paying the minimum payment will incur interest on entire balance outstanding.

Hopefully that provides you some basic understanding around what a credit card is. Remember, credit cards are nothing more than short term loans with a high annual interest rate. They are not free and while they offer you convince, don’t get sucked into using them to finance your life style. Establish good credit habits by paying off your credit card balance in full every month.