Credit Card: What is it and how does it work?

DUBAI, UAE (ARAB NEWSWIRE) -- In today's dynamic financial landscape, credit cards have emerged as a ubiquitous tool in the UAE and across the globe that assists cardholders in making desired purchases and managing personal finances. Along with convenience and flexibility, credit cards have numerous features and benefits that make them a preferred choice.

It is crucial to have a comprehensive understanding of how credit cards work to use them responsibly and leverage their benefits. Cardholders should familiarize themselves with essential concepts like payment due dates, usage limits, fees, rewards programs, and Annual Percentage Rate (APR). With this knowledge, they can make informed decisions and choose a credit card that aligns with their spending habits, lifestyle, and financial objectives.

What is a credit card?

Issued by a bank or financial institution, a credit card provides revolving credit to cardholders up to a specified limit. With this revolving credit, cardholders can pay for purchases of goods and services at merchants that accept credit cards as a mode of payment.

How does a credit card work?

Credit cards usually have a usage limit that is determined based on the customer's income and credit eligibility. When customers use credit cards to purchase something, the credit card provider pays the merchant on their behalf. The cardholder is then responsible for repaying at least the minimum amount by the due date, as indicated in the billing statement sent at the end of each billing cycle. If the cardholder fails to make the minimum payment, card usage may be suspended. Cardholders should also note that failing to repay credit card bills in full will incur interest charges on the outstanding balance. Certain associated charges like annual fees or transaction fees may also be applicable depending on the terms and conditions of the card.

Benefits of a credit card

Credit cards can provide enticing benefits if used responsibly. Some significant benefits of credit cards include:

• Builds Credit History: Responsible use of credit cards and repaying dues on time help cardholders build a positive credit history, which is crucial for future borrowing needs.

·         Cash Flexibility: Credit cards allow cardholders to convert significant purchases into manageable Equated Monthly Installments (EMI), thus reducing financial burden.

·         Emergency Loans: Credit cards can be a readily available source of funds in financial emergencies.

• Rewards and Perks:  Credit cards offer customers rewards programs, such as cashback, airline miles, or points that can be redeemed for various travel perks, merchandise, or statement credits.
• Transaction Security: Most credit cards offer enhanced security features, such as encryption and fraud monitoring, to ensure safer customer transactions.

·         Purchase Protection: Some credit cards provide purchase protection coverage on products purchased through them. For example, cardholders may be eligible for reimbursements or replacements if their orders are damaged or stolen. 

With credit cards becoming widely accepted, people now prefer the convenience and advantages of using this plastic money over physical cash. However, responsible usage of credit cards is essential for maximizing its benefits while avoiding unnecessary debt. One should review their statements, track expenses, and pay their dues on time to stay out of credit card debt. They should also understand the terms and conditions and consider their suitability before applying for a credit card in the UAE. By maintaining disciplined spending behavior and paying the balance in full each month by the due date, individuals can enjoy the benefits of credit cards without risking their financial stability.

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