How Credit Cards Work: Should You Own One?
Chapter 1: Introduction
Hello, friends! I know you are expecting a video on the Pegasus Scandal, but I’d like to wait for a few more days. It’s very recent news with new developments surfacing every day. So let’s wait for a few days, and then I’d make a video on that topic.
In today’s video, I’d like to continue with the Financial Education series. The topic of today’s video is Credit Cards!
Chapter 2: What are Credit Cards?
What are credit cards? How do they work? How do credit card companies make money? And most importantly, should you be using a credit card? What are the pros and cons? Come, let’s find out.
Chapter 3: Using a Credit Card as a “Mini Loan”
Let’s use an example to understand. Suppose you’re a school student and suddenly there’s a pandemic. All your classes are now online, but to attend these online classes, you’d need a smartphone, but you don’t have one. You need to buy a smartphone urgently, but there’s insufficient money in your bank account for buying it. So you ask your parents to transfer some money to your bank account, but it’ll take 2-3 days to transfer the money. But you need to buy the smartphone before your class the next day. What other options are there?
In such situations, you can use credit cards to make the purchase immediately and pay for it later, at the end of the month. So essentially, a credit card is a card that helps you in purchasing things instantly, but you can pay for them later.
Chapter 4: Understanding the Payment Process
There are some payment processing companies like Visa and MasterCard. These two are the most popular companies. They basically provide the back-end infrastructure to facilitate credit card transactions. The bank issuing you the credit cards is distinct from Visa and MasterCard. These two are only involved in the payment processing.
Chapter 5: Credit Limits and Credit Scores
Now, friends, every credit card has a credit limit, the amount of money that you can spend with the credit card without first paying the bank. The credit limit varies from bank to bank and the type of card you’ve bought. The bank checks your salary, your credit score, and decides on your credit limit based on these.
Credit Score is also an interesting concept. If you don’t make the credit card payments and loan repayments on time, then the bank will think that it will be quite risky to give you money. It’ll be unsure about when you’ll repay the advances, if at all. Because the bank takes a risk while giving you a credit card or a loan, to judge this risk, the banking sector has created its grading system. It grades you. The score ranges from 300 to 900 and is known as your Credit Score.
Chapter 6: Advantages of Using a Credit Card
How will you benefit from using a credit card? I talked about one advantage at the beginning of this video, that if you want to buy something immediately, but you want to pay for it later at the end of the month, you can. It helps to meet immediate expenses.
The second major advantage is that using a credit card is less risky than using a debit card. If you’re a victim of a fraud, then in the case of a debit card, the money will be directly deducted from your bank account. But in the case of a credit card, your bank or the credit card issuer will pay on your behalf. And if there’s a fraud, they can investigate it. If there’s actually a fraud, then they’ll get your money back.
The third major advantage is the rewards that you get for using a credit card. The reward systems vary depending on the bank and the type of credit card. In some, you may get cashback; in others, you may get heavy discounts; you may even get insurance in some, like insurance to be paid if you meet with an accident. You can also get travel insurance for free with your credit card.
Chapter 7: Choosing the Right Credit Card
Which credit card is right for you? To decide, you need to remember three main things.
First is the bank that will issue your credit card. Any reward point system, the fees charged by the bank and any hidden fees are mostly decided by the banks.
Second is which of the credit cards offered by the bank will you be using? There are more rewards for high-level credit cards. The insurances and points are also better, but they often have high fees as well.
And the third thing to remember is which payment network is used in that card? As I said, Visa and MasterCard are the two most common networks, but apart from these, American Express, Diners Club and RuPay are also used. Although Visa and MasterCard are so common that there is a negligible difference between the two, but if you see American Express, then it differs a lot from these two because in most of the places Visa and MasterCard are accepted, but not American Express. But American Express offers better rewards.
Chapter 8: Banks’ Perspective: How They Make Money
Let’s look at things from the bank’s perspective as well. How do these banks profit from credit cards? The most simple way for the banks to earn money is by charging annual fees. To use some credit cards, you have to make yearly payments. Apart from this, there are many different types of fees charged by the banks. If you are not making timely payments, then a late fee will be charged. If you want to withdraw cash from the credit card, then there is often an extra fee @ 2% – 5%.
But friends, you’d be surprised to know that a large portion of these banks’ income actually is a result of people’s stupidity. Many people don’t pay their credit card bills at the end of the month. Because of this, the banks charge a high interest rate on it, and this interest rate can be as high as 30% compounded annually, that’s twice or thrice the interest rate on loans.
Chapter 9: The Disadvantages of Credit Cards
The disadvantages of credit cards might already be evident to you. As I’ve said, if you don’t make the payments on time, if you don’t pay your credit card bills on time, then you’d have to pay heavy interest and fall into a debt spiral very quickly.
I’ve also talked about the second disadvantage. There are many hidden fees on credit cards.
Chapter 10: Should You Use a Credit Card?
So the question arises, should you use a credit card or should you not? The answer to it is very simple, friends. If you make timely payments of the credit card bills, then you can use it. On the other hand, if you use credit cards to buy things that you can’t afford, if you think that now I may not have the money, so I’ll use the credit card to buy it and I’ll arrange the money from somewhere within 30 days, then please don’t use a credit card. You may fall into a debt trap.
Third, if you want to get a credit card because of the rewards, then evaluate the situation a bit. The various fees that you will pay to use that credit card, often the processing fee is around 2% – 3%, and the reward that you’d get in exchange, would they actually be worth it? Or are you still losing money?
Fourth, if you’re wary about paying online or anywhere else, about falling for a fraud, then use credit cards in such situations to be safe.
Chapter 11: Conclusion
Let’s meet in the next Article. Thank you very much!
