Finance

What is a credit card and how does it work. How is it different from a debit card?

What is a credit card

A credit card is a card that is not drawn from your bank account when you use it, but from a separate credit account, so that if you pay, the bank pays first. When you pay, you are actually borrowing money from the bank and can draw up to a pre-selected amount, either in smaller amounts or all at once. In addition, the loan is pre-approved and we can draw it down at any time for smaller amounts and we don’t have to reapply for it. With a credit card, we always have some extra money that we can use.

Youcan then pay off the debt you owe to the bank when you pay with your credit card during the interest-free period, which usually lasts between 30 and 55 days (this can vary depending on the terms and conditions). If you repay the debt during this interest-free period, you have effectively borrowed for free and will not pay a penny extra. However, if you go beyond this interest-free period, the interest is quite high, usually more than 20%, which is many times more than for a regular bank loan. Holding a credit card also means that the cardholder is on the debtors’ register.

A credit card is worthwhile for those who pay their debts on time, but if they do not pay them off in the interest-free period, these debts accrue interest in the tens of percentages quite dramatically. That’s why it’s a good idea to remember your credit card debt and really try to pay it off. Of course, for some smaller amounts it may not matter so much, especially if we only have a credit card for a few thousand or ten thousand crowns when we normally pay tens or hundreds of crowns extra (it’s a shame to lose this money anyway), but for larger amounts this inattention can cost us much more.

So why have a credit card at all?

A credit card is a way to always have some extra money on hand, which is good to spend when you know you can pay it off soon. If you need to buy something urgently, don’t exactly have the money in your bank account, but you’re going to pay off the debt out of a paycheck that’s coming in a few days, a credit card can be an ideal way to borrow without having to apply for a new loan.

On the other hand, however, there is a certain spiral that can be associated with any debt. It’s easy to get used to living on debt and using a credit card, even if it’s not entirely necessary.

It’s also possible that we’ll get to a point where we’ll have to pay off credit card debt out of our regular income, which we’ll miss. Ideally, we should get rid of the debt as soon as possible, but the attraction of a credit card is that we always have the money available, plus we can pay it off on time without overpaying.

The difference between credit and debit cards

With regular payments, there’s really no difference. The card is used the same whether it is a debit or credit card. While a debit card is directly linked to a current account and thus the money we actually have in the account is debited when we make a payment, a credit card is linked to a separate bank account from which we draw money to pay at the bank. We then have to repay this debt during the interest-free period with no increase or with interest thereafter.

There is also a difference in the fees. While credit cards are free, ATM withdrawals may incur fees. Cash withdrawals can be charged a few tens of crowns, even when withdrawn from your own ATM. However, this depends on the exact terms and conditions of the credit card in question.

Is it worth having a credit card?

Credit cards may be declining in popularity, but that certainly doesn’t mean they are on the decline. Credit cards often offer various bonuses, which can include discounts for maintaining a premium current account, insurance for products purchased or cashback, where you get a portion of each purchase back when you pay with your credit card (usually up to 1% of the amount paid, with a maximum limit of €20 per month).

It is a very useful tool also abroad. Some hotels or car rental companies require payment by credit card, not debit card. The money is debited directly from the bank account and they can be sure that the payment will not be cancelled.

Is the credit card free? What are the fees?

This usually depends on the terms and conditions of the bank in question and the premium nature of the credit card in question. Some cards with multiple bonuses may have a fee, while others are completely free.

Thus, credit cards can offer interesting benefits where even the fees can be offset by the benefits received. However, the card usually has to be actually used and is especially suitable for avid travelers.

Related Articles

Back to top button