We all know the concept of credit cards, we know what they are and what they are for. We are living in a world that is becoming hastier with each passing day and credit cards have become an essential tool for making fast, efficient and safe transactions. Credit Card companies make sure that using a card brings great value for you; those are the reasons we earn points when we use them, have payment protection against fraud and a variety of benefits from different companies or banks.
Actually, if we use the credit card and pay within a month there is no extra charge, as the debt grows monthly with interests, not before; leaving us just the benefits of using it. Thanks to credit cards we can now buy things from the comfort of our own homes through the Internet, allow service providers to charge us automatically for them, and even buy things that otherwise we could not afford at a certain moment.
But life is not like they make it seem on credit cards commercials, there are concepts that we do not always understand well enough when we use these wonders of the modern world. When we turn eighteen years of age we are then legally capable to own and use a credit card of our own, but just because we are legally able to own one does not mean that we are ready for it. At Premier Consumer, we want to help you understand and give a better use to the main Credit Card concepts and benefits.
There are tons of concepts and terms related to credit that we do not fully understand and we could definitely use before we start charging everything to our credit cards. Therefore, it seems rather convenient to educate ourselves and get to know the benefits we are entitled to as well as the obligations of using a credit card.
“At Premier Consumer, we want to help you understand and give a better use to the main Credit Card concepts and benefits.”
Let us begin with the most basic of concepts to understand: credit. Originating from the Latin word credititus which means to believe or trust in someone, a credit is nothing short of a loan. Be it money or a certain service, a credit is something that a bank or a financial entity gives to a client, person or company, based on the trust that the client will eventually return what has been given to them in the first place; or at least that is how it began.
Nowadays a credit is given to a client in the form of a legally binding contract that will make sure that the receiver pays back the loaner. And just like with any other legal action there are clauses, terms and conditions that must be met and taken into consideration when signing the agreement. Interest rates, minimum payments, deadlines, records, and balances are just some of the most important concepts to keep in mind when we talk about credits.
We can ask a bank for a credit to buy almost anything, from money to start our own business, buy a car or a house, medical expenses that may exceed our health insurance, or even personal expenses like a vacation.
Let us pretend that we want to buy a house, and to do so, we need to ask a bank for a mortgage, a type of credit that is given to purchase real estate. We go to a bank and apply for one. Any self-respecting bank will not just give away money to whomever asks for it. The first thing they will do is checking the records of that person in order to evaluate how much credit they can give them. Monthly incomes, records of previous credits, any other unsettled debt they may have, etc. are the sort of things that a bank will take into account when it comes to giving credit.
If all of our records and requirement seem fit, the bank will give us a mortgage with a fixed interest rate and a deadline to make the payment which could be years away, depending on the type of credit that we are asking for. With the money from the bank we go and buy ourselves a house and now comes the hardest part: paying.
Here is where all the concepts we mentioned before come into play.
Interest Rates: This is where the banks make their money. They lend you now, so they can collect more –interests– later. They also serve to protect the bank’s money and loans from inflation. There are plenty of countries with fixed and controlled inflation rates and there are some where they are wild and ever-growing. If a bank loans a client a hundred thousand dollars and sets a payment deadline in ten years, it is possible that when those ten years pass by that amount of money will not be worth the same and so the bank would be losing money. That is what interest rates are for. They are a fixed percentage in which the debt will increase with each passing month. Say that the rate is 2%, that is how much the owed amount will increase each month.
Interest rates may vary according to the type of credit, the records of the person applying to it, the established payment time, etc.
Minimum Payments: As stated by the name, it is the minimum amount of money to be paid each month of the debt in order to stay afloat and not fall into negative numbers. Usually banks will tell us the minimum payment we can make and will offer it as the most comfortable option. But this is a double-edged sword for us because if we only pay the minimum amount in the long term we will end up paying way more than we were supposed to because of the interests, in fact, sometimes minimum payments only cover the interest rates, leaving the debt exactly the same. By making the minimum payments we extend the debt in time and the more time we keep a debt, the more interest will affect us.
Deadlines: It is the date settled to make a periodic and final payment. In most cases a bank will settle monthly deadlines usually on the same day the credit is given, i.e. the ninth of each month. If we do not make it to the deadline and make the established payment then we increase our debt again thanks to the interests. We may also be subjects of late fees and fines and all of this goes to our records.
Here is another example, let us assume that we are $20,000 in debt with a 10% interest rate and we decide to only make the minimum payments, as we mentioned before banks and financial entities usually will let us know how much this will be. Whenever we make the minimum payment the monthly amount that we have to pay will decrease. Say that in January we have to pay $800, if that’s the least we can pay then on February it will be less, say $774.67 and it will continue decreasing with each month, so in March it will be even less and so on. It may seem like a great idea given that the payments will become smaller with each month, but it actually means that we will be making these payments for longer periods of time; the least we pay the more time it will take us to settle this debt and the more we are at the mercy of interests rates.
If we put these numbers through our Cost-of-Debt Calculator checking the minimum payments options, we will see that it will take us a hundred and fifty two months to settle that debt; that is almost thirteen years! And in that time, the interest rate will make our debt increase by $5,211.72 which is more than 25% than the original debt.
All of these are just some of the basic concepts of credit, and they all apply as well to credit cards. By definition, a credit card is merely a tool that will allow you to acquire credit in a fast and easy way. When you receive a credit card from a bank you are subject to the same basic terms and conditions of getting a loan. Whatever we charge on our card, the bank will pay for us, but then we will have to pay them back.
We strongly suggest you keep all this concepts in mind when thinking about credit and charging stuff to your credit card, this will keep you away from suddenly drowning in a debt you cannot afford. To that end, here we offer a Debt Management Program to help you consolidate and settle your debts in the way that is best for you and suits all of your needs and conditions.
But not all is dark and gloomy when it comes to using credit cards. Used wisely they can also offer a great amount of benefits. All credit cards company acknowledge their best customers, those that generate interests and pay them in a timely fashion. This translates to good credit in our records and gives us a chance to apply for bigger and better credits.
Credit cards companies usually have a fidelity program that rewards its members with some sort of points that can be exchanged for something else, later. For example, they can make a deal with an airline in order to generate miles with every purchase, miles that can later be exchanged for a flight. Another benefit can be accessing a certain discount in stores or restaurants affiliated to the company.
The benefits are limitless. In addition, given the recent rivalry between credit card companies, they are constantly trying to out-do each other by giving more and better rewards to their customers.
A double-edged weapon that can at times be detrimental to the user? Sure. But used wisely and it can also be a great asset. Credit cards are a thing of the modern world to be reckoned with, but they are also the key to a world of possibilities.