How Do Credit Cards Work? A Beginner's Guide



Credit cards are a great tool to add to your wallet. If you are encountering first time with the credit cards then you might have questions like What are credit cards? How do they work? There is way more for you to learn about the credit cards if you do not pay notice to each and every aspect of a credit card then it might end up costing you a fortune.

A credit card is like a double-sided coin having both advantages and disadvantages. Not using a credit card wisely can lead you to a possible debt spiral. In this article, we have covered everything about credit cards that is there to know. Keep reading to kick start your research.


What are credit cards?

A credit card is a financial tool that helps you in borrowing funds from the credit card issuer as and when required. With a credit card, you get a pre-defined credit limit depending on your income level, that you can use to make purchases. It is a plastic card that you can carry with you and is more secure for making transactions. A credit card offers benefits like shopping benefits, travel benefits, entertainment benefits, fuel surcharge waiver, and much more.

Even credit cards are bifurcated into different categories and you can choose a credit card as per your needs and spending habits. There are lifetime free credit cards, secured credit cards, lifestyle credit cards, travel credit cards, fuel credit cards, and so on.


How do credit cards work?

On using a credit card for making purchases, you get a credit card statement after a month indicating your credit card bill that you will be required to pay and the due date. On paying the credit card dues in full and on time, the credit score starts building up. If you fail to pay the outstanding amount on time it can also do more harm than good. 

On making a purchase with a credit card you tend to earn certain rewards either in the form of cashback or in the form of reward points, depending on the type of credit card you hold.


Advantages of credit cards:

The advantages of having a credit card are as follows:

  • You get to earn reward points and other benefits such as welcome benefits, travel benefits, entertainment benefits, etc.
  • With a credit card, you can build a good credit score.
  • The credit card issuers issues time to time offers on credit cards that you can avail of.
  • They are more secure to use and easy to carry.
  • They make the funds available whenever required.

Disadvantages of credit cards:

The disadvantages of having a credit card are as follows:

  • There are high chances of missing the due dates.
  • You can easily end up in a debt trap if a credit card is not used properly.
  • A high credit utilization ratio can affect your credit score.


Bottom Line:

With a parting thought, adding a credit card to your wallet is the most important that you can ever make. A credit card can either be your friend or your biggest foe depending on how you use it. Using a credit card wisely can help you maximise its benefits and you can save a lot with it.

Do share your experience with a credit card in the comment section.

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