How do Credit Cards Work?

A credit card is a type of financial product that allows you to borrow money flexibly on a revolving credit. In simple terms, it provides you with a permanently available line of credit, meaning you can borrow as much as you need and whenever you need, of course, without exceeding your credit limit.

When it comes to making a purchase or paying a bill, a credit card may go into the practice to earn quick money or even save some by getting back in rewards. Simultaneously, you may utilize credit cards to establish a credit history, thus boosting your borrowing power. Now first, let's talk about some of the basic principles of how credit cards work.

Credit Card Application

When you apply for a credit card, you either go through a comparison website or fill out an application form directly with a credit card provider; the choice is up to you. Once you complete your application, the credit card company will take your data to check through credit reference agencies. In the US, there are three major credit reference agencies - Equifax, TransUnion, and Experian. Before approving or rejecting your application, the credit card company will likely check your credit report with one or some credit bureaus to understand how you've managed credit in the past. To approve your application form, most credit card providers require having at least a decent credit score.

Credit Card Benefits

Credit cards are one of the most common types of revolving credit, and they provide various benefits to borrowers. Credit cards have revolving credit limits that borrowers can use as required without paying interest for non-used amounts. Credit cards usually come with bigger monthly payments than non-revolving personal loans or payday loans online. However, credit cards provide tons of rewards such as cash back or points that may be applied toward future purchases or even to pay down current bills.

5 Most Common Types of Credit Cards

Choosing the appropriate credit card might be difficult with so many options available. It typically depends on your credit score, how much you can afford to pay each month, and of course, why you need one. Here, we will talk over some of the most common types of credit cards to understand what they are specially designed for. Please consider that credit cards may sometimes charge extremely high APRs, making them quite unpleasant funding options when you are in a pinch. Thus, you are highly advised not to use credit cards to handle long-term debt.

Rewards Credit Cards

This type of card compensates you for using it by offering travel miles, rebates, or retail discounts. However, it frequently comes with an annual charge and hefty interest rates, so make sure the advantages exceed the expenses. To get qualified, you may need to have an excellent credit score.

Credit-Builder Cards

If you have a bad or no credit score, these types of credit cards may be an excellent option to establish your credit. These cars are mainly intended for high-risk borrowers; thus, they may come with higher APRs and lower credit limits. However, making your monthly payment on time and in full might reveal you as a responsible borrower, allowing you to receive better credit offers in the future.

Balance Transfer Cards

By transferring your existing card debt to a balance transfer card for a nominal charge, you can minimize the amount of interest you pay. These cards often provide a 0% interest rate for a certain period. To obtain one, you may need to have a high credit score.

Purchase Cards

Do you want to spread the expense of a large purchase? These cards often feature an interest-free term, making them an affordable option to borrow. To preserve the 0% interest rate, you preferably need to pay off your debt before the interest-free period expires.

Money Transfer Cards

Essentially, you may borrow money with this form of a credit card. For a nominal cost, you may transfer funds directly from your credit card to your bank account. It's widely used to assist bank overdrafts. The debt isn't erased, but it is transferred to your card. Money transfer cards usually have a 0% interest rate term, but you may need a decent credit score to get qualified.