Although most of us are familiar with credit cards and know how to use one, it’s fair to say that many of us could benefit from a better understanding of the features to consider at when comparing the different ones available. This credit card guide aims to walk you through the credit card maze and help you identify the different features that could be important to you.
Credit cards offer a convenient way of payment and, when used properly, they can provide flexibility, together with a range of useful benefits for the cardholder.
It gets confusing, however, as there are often too many to choose from and it can become quite a challenging exercise…
- How do credit cards work?
- Advantages and disadvantages of credit cards
- What to watch out for?
How do credit cards work?
A credit card is a small plastic card which allows you to make payments at different places without the use of cash. When you take out a credit card, there is a credit agreement between you and the bank which includes the fees for using the card and the amount of interest payable on balances amongst other thing.
When you pay for something using a credit card, you are effectively borrowing money from your bank or your lender. Every month you will receive a statement which lists all the transactions you have made with the place, the price and sometimes even the item. Once you get your statement, you have a certain amount of time to pay back the bank for the purchases you have made.
You can opt to pay the full amount that you have spent, a different amount or the minimum balance the lender requires you to pay. If you pay your full balance within the time period provided to you on the statement (’Due by Date’), you will not be charged interest. However if you decide to pay less than the full amount, you will be charged interest as set out in your credit agreement.
Advantages and disadvantages of credit cards
Advantages
- Convenient way of making purchases especially for international booking or home delivery goods where you are not at the location.
- Allows you to avoid walking around with a pile of cash in your purse or wallet.
- Free, short-term credit – as long as you always pay your balance in full by the due date shown on your statement.
- Protection against fraud – if you are the innocent victim of fraud you will not be expected to pay if a criminal uses your card.
- Rewards – many credit cards provide rewards such as cashback, discounts (for instance, on golf greens or hotels), air miles that you can redeem and save. [Read more: Use cashback card wisely | Rewards or cashback: Which credit card is best?]
- Credit cards are accepted in virtually every country around the world and make traveling to other countries easy.
[Read more: Benefits of a credit card]
Disadvantages
- If you do not pay your full balance, you will incur interest which varies from lender or lender and effectively increase the price of your purchase.
- While it is easy to make payments, it is very easy to run up large amount of debts.
- You have to be careful when using a credit card to withdraw cash, as there is no interest free period of cash withdrawal from a credit card.
What to watch out for when using a credit card
Credit cards are so easy to use and we live busy lives today so it is easy to overlook the relevant details. Fees to watch out for include late payments, exceeding your credit limit and returned payments, such as if your cheque bounces or a direct debit is declined. Common charges include fees for cash withdrawals, balance transfers and overseas transactions.
Sometimes the rate advertised may not be the rate that you will receive as it may depend on your credit score i.e your credit history. Once you have applied the lender will then decide the rate and the credit limit to. Apply, although you should then have the option to decline the card if the rate is too high.
Make sure you are aware of the fees due both for using the card locally, internationally together with any other charges on payment of your balance.
Check whether you are paying Credit Shield – a type of cover typically sold with your card for a monthly fee – which gives you protection on your balance in unforeseen circumstances such as disability or death, but may not pay off the full balance. You can opt not to pay it if you do not think the cost is worth the cover.
Islamic credit card guide
When a consumer takes out a conventional credit card, they pay interest on the amount spent along with any service fees. But this concept is unworkable for Muslims as avoiding interest (riba) is one of the main principles of Islamic banking.
An Islamic card conforms to sharia principles by avoiding any forbidden (haram) financial practices. No interest is charged on a card’s outstanding balance, but a service charge is levied annually or via monthly installments. Customers who do not pay off their outstanding balance may be charged a fee. Some Islamic banks may choose to levy a profit rate on outstanding balances. [Read more: How does an Islamic credit card work?]
