On more than one occasion I have recommended that you avoid using credit cards, so as not to have debts (or not to increase the ones you already have). However, it is increasingly common to see the use of these on a day-to-day basis.
And it really is that credit cards can be useful if when you decide to have one, you also commit to learning to use it intelligently and responsibly.
In this article, we will see what it means to have a credit card, the advantages and disadvantages. I also want to share some tips to make good use of credit cards.
If you have one (or several, I hope only one ) or are thinking of applying for one, read on, these tips will help you keep your finances out of harm’s way.
What is a credit card?
We all know its physical form, it is a plastic card with a magnetic appointment that contains the information of the holder.
But beyond its physical form, do you know what it really is?
A credit card is a form of short-term financing, issued by a bank or financial institution that authorizes a person to use it as a means of payment. The user accepts the obligation to return the borrowed amount and pay interest, bank commissions and expenses, within a certain period that is normally 30 days.
How do you pay for a card?
The money that the bank lends you through this credit card can be returned in different ways:
- End of the month. The total payment of the debt is made at the end of the month, interest is not applied, but it may carry expenses and commissions.
- In installments. The debt is paid in installments through a fixed monthly fee or a percentage of the debt, plus interest, expenses and commissions. The debt is renewed monthly, decreases with the payment of installments, but increases with the use of the card.
Credit Card = Short Term Financing
How to get a credit card
To obtain a credit card you have to request it in person or online. This last option is increasingly the most chosen for its convenience and because there are more and more online banks.
The bank or financial entity is in charge of granting or not a credit card to whoever requests it. For this, it studies your indebtedness capacity, to ensure your solvency and assign you a maximum credit limit on your card.
Currently, having a credit card is a matter of a few days. Some entities can even give you a card without having to change banks. For example: Santander Consumer Finance , Advanzia Bank, Wizink.
Differences between a credit card and a debit card
If you carry several cards (credit and debit) in your wallet and use them interchangeably, it is better that you know the differences between them before your next purchase.
Way to pay
This is the main difference between a credit card and a debit card.
When you make a payment with your debit card, the amount is deducted directly from your checking account. Therefore, the payment limit corresponds to the funds you have at that time.
On the other hand, with a credit card you can make a payment even if you have no funds, the bank lends you the money and you defer the payment until the following month.
A credit card allows you to pay for a purchase in installments, within a certain maximum limit.
With a debit card, any payment is charged directly to your account and reduces your balance.
The withdrawal of cash with a debit card at an ATM of the same issuing bank, normally, does not carry any commission.
Advantages and disadvantages of having a credit card
Like any financial product, it is important to know the advantages and disadvantages associated with it. Here I mention some:
- They usually have free insurance. For example, in case of buying and receiving a defective object, also travel insurance.
- Some services only accept credit cards. For example, car rental.
- It is a good option when you travel, because they are accepted in millions of establishments.
- They are useful when you have to postpone the payment of an unforeseen event or a large purchase and at that time you do not have enough money.
- If you don’t keep track of your spending, you may be in for a nasty surprise when the charge hits your account.
- It can easily lead you to make unnecessary purchases.
- You can abuse installment payments for all types of purchases (not just unexpected ones), and this will lead you to accumulate debts and pay high interest.
7 Tips to make good use of credit cards
Depending on how a credit card is handled, it can be useful or a nightmare. Some people use them as a form of financing that ends up becoming a problem that they find difficult to get out of. That is why it is so important to know how to make good use of credit cards.
Here are 7 tips to help you handle them wisely and responsibly:
1. Before applying for a credit card: find out
If you are thinking of applying for a credit card: find out first, compare and then choose.
In Spain you have a wide variety of credit cards, choosing one is not easy. Therefore, do not hesitate to use comparators or collect information on your own. I recommend you look at their characteristics (fees, payment method, links, insurance) APR and other advantages they may have.
Choose the credit card that best suits your purchasing habits and has the best conditions. In this Rankia article you will be able to know the best credit cards of 2021
2. Know the difference between deferred payment and payment in installments
Be clear about the difference between deferred (or deferred) payment and payment in installments. With the first you are only delaying the payment of the total of your debt without interest, on the other hand, with the installment payment you are contracting a debt that entails the payment of interest.
Use deferred payment to avoid paying interest and thus take advantage of free credit. For example, if you have to make an expense, you can postpone the payment for a few days or until the following month to make the payment in a single installment without interest. The installment payment is basically a credit with high interests.
3. Control your expenses
Keep track of your expenses with both your credit card and debit card to monitor your personal budget .
You can use your bank’s mobile application to control all the financial movements you make.
4. Avoid using ATMs
Currently, many establishments accept card payments. This prevents us from carrying money with us, with the risk of spending it on small things or losing it.
Avoid withdrawing cash from your credit card, unless it’s an emergency. This operation may involve high interest.
5. Be careful with credit cards and rewards
Some credit cards offer rewards for their use: miles, discounts, rebates, etc.
However, your decision of which card to use should not be based on these rewards but on the conditions that suit you best, such as the lowest interest rate or no fees or charges.
6. Don’t forget these dates
When you have a credit card there are very important dates that you should not forget:
- Settlement Period. It is the period of the month that is taken into account to add the operations carried out with the card.
- Cargo Date. It is the day of the month when the bank or entity is going to collect the debt from your account (depending on the payment method you have)
Paying the installment on time will avoid paying interest on late payment and other commissions and expenses.
7. Do not use the credit card to cover debts
Avoid having more than one credit card.
Taking out a new credit card to cover some debt is not a good idea anywhere in the world. On the contrary, it will be making you chain debts and getting into an even more complicated problem to get out of.
A credit card is a financial instrument that we often run away from, and with good reason. However, if used responsibly it can become our ally, or on the other side, if we misuse the funding we can get into big trouble.
I think the key is not to be impressed by the supposed opportunity to consume products or services that you would not otherwise be able to access if it were not for credit cards. If not, see the opportunity to take advantage of the advantages it has. For this it is essential to know how it works, the conditions and learn to handle this plastic that you have in your possession.
I hope that these tips will help you not to jeopardize your personal finances and take advantage of credit cards. I would like to add that you do not forget the importance of controlling your expenses and avoiding spending more than you earn, to avoid debt.