Credit Cards

A credit card is primarily a payment instrument allows you to do make payments to merchants or take cash advances. They often bring you other benefits like rewards programs and special offers from select merchants also.

The bank issuing the card, grants a line of credit (credit limit) to you (the consumer or the user) from which you can borrow money for payment to a merchant or as a cash advance. A credit card is different from a charge card, which requires the balance to be paid in full each month. In contrast, credit cards allow you to 'revolve' your balance or make part payments, at the cost of having interest charged.

The bank will typically not levy and fee or interest if payments are made in full by due date. However, interest charges and other fees like Late Payment fees are charged when you make part payment or your payments are late.

Choosing a credit card

Used wisely, credit cards can help you make the most of your financial resources. You can use cards to make some purchases more easily and securely — like travel reservations and they can even help you budget and save. But to enjoy these benefits, you need to choose a card that's right for you, and use it carefully.

To find the best card for you at the lowest cost, you need to consider these three major factors:

• Interest rate
• Grace period
• Annual fee

Not all cards charge an annual fee, so you may be able to avoid that cost entirely. But be sure to read the fine print: Some no-fee cards start charging a fee after the first few months.

A card's grace period and interest rate probably have the greatest effect on the cost of credit. A grace period is the number of days before a company starts charging interest on new purchases. If there's no balance due on your card, no interest will be charged from the statement closing date through the day payment is due. But if there's a balance, the grace period is eliminated. If you pay your bill in full every month, having a grace period may mean you never pay interest. And the longer that period is, the easier it may be to pay in full each time. But if you regularly carry a balance, finding a card with a lower interest rate will be more important to you than finding one with a long grace period.

Using a credit card wisely

The freedom a credit card offers may be exciting at first, but it's important to take the responsibility of credit seriously. Using your card wisely may help you stay out of credit trouble and avoid getting into debt. The first step is matching your spending style to what you can afford to repay when the bill arrives or within a few months.

To avoid overspending, it's always recommended that you create a budget for your household, and keep your spending within those guidelines. If you're unsure if or when you'll have the money to pay off a purchase you need to put on a credit card, it's probably safest not to make that purchase.