Credit Cards - An Expensive Loan
Credit cards make access to loaned funds, or , really, really, simple. The ease with which people can borrow money with credit cards is both their huge advantage and their huge disadvantage.
Most people know how credit cards work, but just in case you've been on a secret NASA space flight round Neptune for the last couple of decades we'll briefly run over what credit cards are.
How credit cards work
Take one of the earliest credit card company’s: Barclaycard. Providing you meet their lending criteria they will give you a credit card and a set amount of credit that you are allowed to use. If this is your first credit card and your is relatively short, then you are likely to get a card with a comparatively small amount of credit available to you. As the months go by and you prove yourself to be a responsible card user Barclaycard will increase that credit limit.
Ways to Use The Credit Card
There are two ways to use a credit card. You can either go into a shop, (or buy goods over the internet), and ask the retailer to deduct the price of those goods off your credit. Or you can go into a bank and draw out cash or transfer funds to your bank account, which is also counted as a cash transaction.
When you purchase goods you get an interest free period, often about 50 days in which if you pay back the full amount of the purchase so you won’t be charged for using the credit facility of your card.
Cash transactions are usually subject to a higher rate of interest than purchases and often the interest starts being charged from the moment the transaction is registered on the card’s account.
Credit Card Statements
On your credit card statement you will get a list of all the transactions you have made during the preceding period since your last statement. This is your opportunity to either pay back all the money you have borrowed or leave some on the account. If you leave some on the account it will be subject to interest. Your credit card statement will show you the rate of interest that is being charged and it will indicate the amount too.
The problem with credit cards is that they are usually one of the most expensive ways to borrow money. Store cards are actually more expensive, but compared to an arranged personal loan, credit cards usually work out costing you far more.
Advantages of Competition
These days all the major financial institutions that offer credit cards are being so competitive amongst themselves that you can get some very good deals and if you know what you are doing and are very self-disciplined you can even make this current spate of low interest and interest free offers work in your favour. But that is not for everyone.
Some people try to beat the system by using one credit card to pay off the outstanding balance they have on another card. And although it might feel as though you’re winning, you’re actually only cheating yourself, because if you are clearing the balance with one card by using the other we have to assume that you can’t actually afford to clear the balance properly with your own funds. So month after month you are going to be stuck in this position, and making little difference to the actual amount of debt that you have.
Balance transfers allow card holders to transfer the money they owe to their existing credit card to another, usually at a special rate of interest. The new credit card company pays off the old credit card debt and transfers it to the new card. This article will tell you how to play the game.
“Danger, Will Robinson!”
Using a credit card to tide you over a difficult financial period in your life or to achieve that holiday you have been promising yourself for years is a huge temptation. Or maybe you have a business venture that you feel is about to break through and you just need a couple of months income to allow it to take off; no matter what it is, if you use your credit card, although it will be simple to get the money because you don’t have to ask anybody for it or fill in any forms, remember, it wont be as simple to pay it back. Debt is a nasty and powerful monster that can easily overpower you.
So, that is our brief guide to credit cards and if you have read this far, welcome back from Neptune.