The decision to apply for a credit card is definitely a daunting one. It’s something that the younger generation can be put off by, mainly due to hearing stories about credit card holders who ended up in a worse financial situation than before they had a credit card. But with all the horror stories that lurk in one’s mind as they think about credit cards, there are some benefits that are worth considering. So here’s a quick guide to how credit cards work, with a few points that outline the pro’s and con’s for making this kind of decision.
The structure of a credit card is comparable to that of a loan taken out from a bank. In order for the issuer of the credit card (i.e. the bank) to make profit, they need to put interest on the credit card (just like any other loan). When you start seeing the relationship between the credit card and the loan, the logic starts to reveal itself. When you pay off the closing balance each month, you prevent an increase on your interest rate. If you forget to make your credit card repayments (i.e. the loan repayments one might pay for their car or mortgage), then consequently, this will result in an increase in the interest rate, and even a late repayment fee.
While the similarity between a credit card and a loan lies in the structure, the main difference is in the terms and conditions. A loan would usually be issued on a 1 to 7 year term, in which the loan would need to have been fully repaid at the end of the term. Credit cards, however, are not issued on the same terms as a loan, instead issued with a maximum spending limit.
Things To Keep In Mind:
1) When you apply for a credit card, you need to nominate a Maximum Spending Limit that will best suit your spending. Bear in mind that there is also a Minimum Spending Limit, which may also assist you in choosing a credit card. Most banks will not charge you for exceeding your maximum limit, and they will contact you if you do exceed your limit. However, if you are over your limit, any further transactions may be declined, which is a disaster for any direct debit transactions that you have previously set up.
2) As mentioned previously, the use of credit cards involves interest. There are multiple types of credit card interest including: Purchase Interest (which is the interest generated from balances that are not fully paid off by monthly payment), Cash Advance Interest (e.g. the ‘Credit’ option on an ATM, allowing you to conveniently withdraw some expensive cash), and Balance Transfer Interest (when you transfer an amount from one card to another).
3) The monthly repayments you make on your credit card are a percentage of what you spend each month. So if you’re spending more ‘conservative’ amounts of money from your credit card, you should be in a bit of a safety zone. Bear in mind, if you are spending more excessive amounts of money; alongside paying the interest for cash advances and the interest for that new TV that you didn’t fully pay off, then you might find yourself in a bit of a sticky situation.
So, essentially, your process for making the decision of applying for a credit card, should depend on your abilities in managing spending and making timely repayments. In other words, if you pay the bills on time, can stick to a budget and overall, have a good credit history; then the decision to apply for a credit card should be a bit easier.
There are a number of aspects of having a credit which are definitely beneficial to its holder. The first is the ‘Interest Free Period’, which is an amount of time (usually days) in which no interest will be charged on a new purchase, providing that you pay off your balance by the due date.
The strongest, and most unique, benefit for having a credit card is in the ‘special offers and promotions’ area. While there are a myriad of different types of credit cards (all with their own kinds of special offers), the credit card that is without a doubt, at the forefront of a quality range of special offers, is the MasterCard. MasterCard have recently showcased their ‘Priceless Experiences’ package for their credit card holders, which includes a range of promotions exclusive to a large number of cities around the world. For example, MasterCard holders who wish to have a special night out in Melbourne will be able to make priority reservations at some of the top restaurants in the city, as well as receiving complimentary tickets for activities and events upon particular purchases. Or if you are a world traveling MasterCard holder, you will be able to have access to a special range of special offers and discounts in pretty much every place you go to.
If you are the person who is disciplined in spending and in keeping to a budget, then a credit card may just be the perfect next step. Furthermore, a credit card may just be the perfect reward for your discipline in saving in spending, in which case you will need to assess the various benefits on offer. MasterCard provide some extremely strong benefits, as alongside their ‘Priceless Experiences’ package, MasterCard also offer a range of 0% Interest Payment Plans, special offers in Extended Warranties and Prices Protection upon the purchase of products, and a thorough protection and safety for their card holders.
Mastercard Priceless – Global Activation Strategy from Department of the Future on Vimeo.