Credit cards are part of our financial life. It is easily found in everybody's wallet or purse. However, not many people know their true functions and from that, they end up having a big amount of debt. You could get the inside scoop from somebody who deals with it each day.
1. Let me explain a true essence of credit card. It is a tool to ease payment process for purchase done online and offline. The issuer will grant you some outstanding loans, called card limit, based on your financial capability and credit history. If you have no income to proof you are able to pay the loans, guaranteed you will not get high credit limit. Furthermore, if you have bad credit history, or even blacklisted, there is no way a bank wants you to become its customer especially in lending position. So, in short, credit card is a mere reflection of how much funding you have in the bank now in order to pay all the spending you have charged to the issuer.
2. Take a look at the loan limit. Yes, it gives us some satisfaction to see that limit. Yes, it makes us feel richer. But, no, it is not an extension of our money condition. In fact, it is not real loan as its interest rate is much higher than secured installment loan from direct lender. I give you an example that if you buy a motorcycle using your credit card, the monthly installment will be higher than if using standard auto-loan. It is because there is no product secured by the bank which serves as a guarantee of the installment payment. Thus, the bank assumes the risk of that particular customer inability to pay his or her monthly obligation is much higher. This risk gap is turned into higher interest to cover a bank possible loss of money. I suggest you to use standard secured-loan or mortgage to buy consumptive items unless you have jotted down the pros and cons before.
3. As competition among banks is extremely higher, they offer some incentives to loyal customers. It might come as a purchase discount in several restaurants, book stores or other merchants for certain periods. It might also come as loyalty points that can be redeemed with cool stuffs for your home. In short, it gives us benefit. We can use our credit cards to save money. Well, 20% discount in our favorite restaurant sounds really good. And, if we use the same brand for our purchase over and over, the loyalty bonus points are surely enough to be redeemed for a new shaver!
Those are the functions of credit card. The key is that you have to use them wisely to gain advantages of it.
Marciana M Padmi is the founder of perfume blogs http://www.chicwhiff.com. She was a banker. Currently, she runs a successful home-based-business by joining cosmetics, perfume and wellness company ORIFLAME and on the right track to reach financial freedom.