working of credit card

A credit card has become an important financial tool for each and every individual. In the UAE, there is a positive growth in cashless transactions in the past 5-6 years. Currently, the usage of plastic cards is more than the usage of cash in UAE and even the UAE government has a good share in promoting cashless transactions. Amongst other plastic cards, credit cards have gained good popularity taking the benefits and offers provided into consideration. But before getting a credit card, the applicant must have good knowledge about the working, else it can misfire badly. Here’s how a credit card works, 

Working of a Credit Card 

A credit card looks like any other plastic card that can be swiped or used online to perform transactions. But the way money funded on the card is something that makes a credit card unique. Unlike a debit card, the money is funded is on the card by the card provider. Every credit cardholder will be provided a credit limit. A credit limit is a maximum amount the cardholder gets on his card. 

Credit Limit – The credit limit will not be the same for every individual. The card providers assign the credit card according to the cardholder’s income, employment status, existing debts, etc. So the cardholder will be given a certain limit where they can make purchases. The credit limit gets restored for every billing cycle. 

Billing – At the end of the billing cycle, the credit card bill which is also known as credit card billing statement will be generated.

So if your billing cycle starts from July 22nd, your credit card statement will be generated on August 21, considering the transaction from July 22 to August 21. From August 22 the credit limit will be revived starting a new billing cycle.

Check: What does a credit card billing statement consist of

Grace period – Once the credit card statement is generated, the cardholder will be given a date to clear the due. The grace period differs from each bank/ financial institution. Some banks in the UAE provide a grace period of 45 days as well. 

For example, you bought a phone of AED 500 using your credit card on July 22 which is the first day of your billing cycle, so the cardholder may have time till  September 5 to pay the due payment assuming the grace period provided is 45 days.  

Minimum payment – Credit card providers i.e. banks/ financial institutions provide a facility to pay the minimum payment on the card bill. Usually, at most of the banks in the UAE, the minimum payment is 2%-5%. Credit cardholders who can’t pay the total bill amount can make the minimum payment suggested by the bank to avoid interest rates and late payment charges. But it is not advisable to make a minimum payment on the credit card bill as it can pile up a huge debt if this is continued for a longer time as the interest rates on the credit cards are higher.

Also check: What is the best time to make a credit card payment

Interest rate – As said earlier, banks provide a grace period for cardholders to pay the bill. If the bill(full payment or minimum amount) is not paid on or before the due date, there will be the interest rate added along with the late payment fees.  

Supplementary card – Credit card providers also offer one or more supplementary cards on the primary card. Most of the banks in the UAE provide these supplementary cards for free. 

Supplementary cards work similarly to the primary credit card. All the benefits provided on the primary credit cards are offered on the supplementary cards. But the only thing that makes the supplementary card different is the credit limit. If the primary cardholder gets a credit limit of AED 50,000 then this can get split between the two cards or how many ever supplementary cards are present. The primary cardholder is also given a choice to provide less credit limits on the supplementary cards. 

Credit Card Fees and Charges 

While understanding the working of a credit card, the cardholder must also learn the charges and fees levied on it. There are some fees levied on a credit card like annual fees, late payment fees, interest rates, cash advance fees, etc. 

You must have a clear knowledge of these charges and check if any of those are added to your credit card statement. If your credit card billing statement consists of any additional charges then ensure you are aware of it and no false charges are levied. 

Credit Cards offers and rewards 

As mentioned credit cards are known for the rewards and discounts provided. Each credit card provides different benefits like airmiles, cashback, discounts, and much more. While picking a credit card one must check the benefits provided on the card and pick the one which can help him in saving money. Picking the right credit card depends on the applicant’s spending habits.

Related: Tips to choose the best credit card

Travel Credit Card: A frequent traveler can get a card that provides airmiles or travel discounts. 

Shopping/ Cashback Credit Card: Shopaholics can get a cashback or card with high shopping discounts. 

Dining Credit Card: If you are someone who dines out frequently, then you can get a credit card with dining offers and save money on your regular dining bills. 

Movie Credit Card: There are a few banks that offer specific credit cards for movie lovers. Using credit cards with movie discounts/offers can be beneficial for frequent moviegoers.  

Rewards Credit Card: On a rewards credit card, there will be some reward points generated according to the purchases made using the card. After a certain limit of rewards accumulated, cardholders can redeem these for discount vouchers by logging into the bank’s internet banking account. The credit card offers provided can be found on their bank’s website. Cardholders can find the details of rewards i.e points gained, used(particular month) and expired points, etc.  on the credit card billing statement as well. 

Therefore apart from the fees and charges, credit card applicants must also check the discounts on the cards and get one. Once you get the card you can check the offers provided on your specific credit card and make purchases accordingly.

Maybe interested: Check the offers on your credit cards

How are credit cards and credit score related? 

Along with a lot of other financial factors, credit cards contribute majorly to the credit score of an individual. The usage of a credit card will have a high effect on the credit score. Hence while knowing the working of a credit card it is necessary to understand how it can impact your financial life. Maintaining a less credit utilization ratio can have a positive impact on the credit score.

The credit utilization ratio is the ratio of credit limit you are using to the available credit limit. If your total credit limit is AED 10,000  and you use AED 5000 then your credit utilization ratio is 50%. If you get another credit card of limit AED 10,000 then your credit utilization ratio will reduce to 25% which will boost the credit score. 

Therefore while closing any credit card account you must keep your credit utilization ratio and mind and close it else it can have a negative impact on the credit score. 

Read: Steps to follow to close credit card account

The usage of it can be very simple only when the cardholder understands the working of the card properly else it can land them into a bad credit card debts trap. So the credit cardholder must understand every detail of the card and make smart use of it. 

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Nikhita
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.

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