“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” – T. Harv Eker
The road to financial success is rocky and long. There are many financial decisions that when made individually and evaluated collectively, contribute to managing money well and efficiently. And as you begin to walk on this metaphorical road to financial success, you come across several financial instruments that help you pave your way.
One of those wondrous instruments is a Credit card.
What is a Credit Card?
A sum of money that the bank lends someone which is required to be returned later is by definition called ‘Credit’. Hence, in the simplest of terms, a credit card is a rectangular piece of plastic or metal issued by a bank or financial services organization that lets an individual borrow funds to pay for goods and services.
The condition being that the cardholder must pay back the borrowed money with the applicable interest or any other charges depending on the type of card. During the billing time or over an agreed upon period of time, the bill can be paid.
So, you’re not exactly using money to pay for the said goods and services, you’re using a promise of paying the amount in the future.
Why Use Credit Cards?
Personal finance experts have quite a list of suggestions when it comes to managing money and Credit cards aren’t at the top of that list of things. There is a general air of implied irresponsibility around the concept of using credit cards and experts advise people to be wary of reckless spending via the cards as there’s always a possibility that it could lead to debt.
However, using a credit card responsibly and judiciously can work wonders in managing personal finances efficiently and can return immense benefits as compared to other monetary instruments and tools used for transactions.
Let’s take a closer look at all the benefits one can capitalize on by using a credit card.
Get Amazing Reward Points With Credit Cards
One of the biggest perks of using a credit card is that they are configured in a way that allows the cardholder to earn points per dollar that is spent. These reward points can be earned by spending on the most basic of things like groceries, fuel or even restaurants. And when a good amount of reward points is collected the cardholder can redeem them for travel or leisure purposes of various kinds, to buy merchandise or they can simply avail gift cards.
Fact: 80% of the eligible card holders choose to redeem their reward points in the form of ‘Cash-backs’
Credit Cards Cash Back
There’s a valid reason why such a large percentage of credit card users redeem their points in the form of a cash back. The initial cash-back credit card was made known to the common man of the United States by a company called Discover. The basic idea being, after using the card, 1% of the purchases made would get refunded to the cardholder’s account in the form of cash-back. And this was just the case in the earlier days, today, cash-backs have become such a trend that some card companies offer 2%, 3% or even as large a percentage as 6% cash-backs on some select purchases.
Fact: The average cash back credit card’s initial rewards bonus has increased by 6.60% year over year in Q1 2022.
History has it, this particular benefit has existed for longer than any other. In the 1980s American Airlines began providing their customers with a new way to earn frequent-flyer miles even if they were not flying. This happened when the airlines partnered with the kingpin of credit card companies, Citibank. Over the years all major domestic and international airlines have embraced the concept and now have at least one credit card that offers a similar set of services.
Fact: American Airlines, which was one of the pioneers of the Frequent-Flyer program, today, has around 115 million members.
Building Credit Score
If you’re looking to improve your credit score or even build one for yourself, having a credit card and using it judiciously is the way to go. When it comes to applying for loans, one of the first things a bank will look at is the credit score. And having a good credit history and score will aid in the long run especially if it’s a big loan. A good credit score is the key to saving a lot of money on mortgages, insurances etc. Hence, being “Credit visible” is really vital.
Fact: As of April 2022, the average credit card utilization was just over 31%, up from 29.6% a year earlier.
What is a Credit Score?
Credit score is not something many people are aware about far be it for them to maintain or improve on it. There’s a stark lack of financial literacy that seems to be the reason for a big chunk of the population not knowing about the credit scoring system. Credit score is generally a three digit number that is used by various lending institutions to help them decide if a person can be approved for a mortgage, a credit card or any other kind of credit. The score reports are an effective way for the lenders to evaluate the credit risk the individual poses. Every individual has their own credit score. The likeliness of a person receiving credit highly depends on their credit score. The score usually ranges from 300 to 850. Higher the score, better the terms of credit.
To have a better understanding of what a credit score is and all its facets, keep reading our article series.
Fact- About 10% of American adults don’t have a credit score.
Types of Credit Cards
Different types of credit cards serve different purposes for their holders. There are several categories the credit cards are issued in and a select few of them are:
Balance Transfer Cards- These have relatively low interest rates and fees when balance is transferred from another credit card.
Charge Cards- These cards don’t have a preset spending limit but don’t usually allow one month’s unpaid balance to be carried over to another.
Premium Cards- These cards are considerably expensive in terms of annual fees but offer perks to their holders like concierge services, access to the airport lounge, access to special events and more.
Reward Cards- Based on what the cardholder’s spending habits are, these cards offer them benefits like cash-back, travel rewards etc.
Secured Credit Cards- To avail these cards, the holder must submit an initial cash deposit which the issuer holds as collateral.
Standard Cards- The most basic of credit cards. These cards simply let the holders make purchases, transfer balance etc without an annual fee.
Fact- An American on an average has 3.8 credit cards.
Debit Cards Vs. Credit Cards
Both these cards look the same and there isn’t really much that catches the eye while looking at them superficially. They have the identical 16 digit numbers, magnetic strips, the mentioned expiration dates and of course they let you make purchases offline and online.
But, the major difference and the one that actually matters is that debit cards let you spend the money you already have in your account while credit cards let you borrow the money you wish to spend or withdraw up to a certain predefined limit, from the card issuer.
There are other key differences between a credit card and a debit card and they are as follows:
- Basically is a loan
- Helps you build credit
- There can be interest charges
- There’s a monthly bill
- Benefits like: rewards points, cash-back or discounts
- Linked to your financial account
- No way to build credit
- No interest charges
- Can withdraw cash via ATMs
- May come with benefits like cash-back
Fact- The number of debit or prepaid MasterCards in the U.S. in 2020 was 250 million. But, the number of VISA credit cards was 343 million.
Facts & Figures
About Credit Cards
Credit cards are such a huge success worldwide that the credit card transaction value in the U.S. alone is 3.92 billion USD. VISA happens to be one of the most loved credit card brands and has a transaction volume of 188 billion.
Canada is the country with the highest credit card penetration in the world. People love to shop online as well as offline, using their credit cards. So much so that the credit card market share for in-store shopping in the U.S. is 40%. And 19% of the Europeans’ market share is through shopping online using credit cards.
According to a recent study by the Federal Reserve Bank of San Francisco, in 2021, of all the payments that were made, 28% were made via a credit card. The study had been tracking the usage of credit cards since 2016. And the aforementioned percentage is the highest that had been recorded so far.
About Credit Card Usage
The usage of credit cards is evidently gaining good ground as the number of credit card users is increasing rapidly. In Q4 2021, there were a total of 196 million users as per sources at TransUnion. And from those 196 million total users, 20.1 million were new accounts. This indicates a 60% annual growth as compared to the previous year.
Credit card issuers and credit card networks are two different things. More often than not, both these are interchangeably used (wrongly) and there’s quite a bit of confusion amongst the public. While a credit card issuer is a financial institution that provides an individual with a credit card, a credit card network does more than that and provides a communication system between a merchant and an issuer to help facilitate a credit card transaction. Few of the most widely known credit card networks (as of 2020) are- VISA (340 million credit cards in circulation), MasterCard (246 million credit cards in circulation), American Express (57 million credit cards in circulation) and Discover (53.8 million credit cards in circulation).
In a Nutshell
Credit cards, if used wisely, can open the door to the world of efficient personal financial management. Pay your bill before the due date, stay within the credit limit, take care of your credit score and be alert when making transactions, and you’re good to use your credit card for as many purchases or transactions you want. With a sensible combination of using your credit and debit cards you can enjoy rewards and benefits all the while keeping your finances in check. This will not only help you manage money but will also help you save a lot of it.
Liked reading this? Stay with us, we’ll be back with a detailed piece on Credit score and everything that you need to know about it to master the world of credit cards.