What exactly is Credit and what are Credit Cards?

Simply put, a credit card, or credit, is an agreement between you and a financial institution. The financial institution lends you the money you need and in return expects you to pay them back over a period of time. The amount of credit extended to you depends on many factors (including income, bill payment history, etc.). In most cases, you are not required to pay back the entire amount immediately. The financial institution charges you additional fees, determined by an interest rate, for the flexibility of re-paying over time.

For example, you want to buy a new TV in time for party at your house. The TV you want costs £500. However, you can’t afford to spend £500 on a new TV all at once. Credit allows you to buy that TV today and then pay it off over time (usually subject to a minimum payment). However, you must be aware that in the end, the TV will cost you more than £500 when you add in the finance charges. That is the trade off when using credit cards.

Credit cards can provide unique advantages over cash, or checks:

Convenience – A credit card allows a person to carry less cash and to order out of catalogs. Additionally, it is the only way most online stores will accept payment.

Emergency Funds – Situations arise when extra money is needed fast. Credit cards allow for emergency car repairs, health care or even cash.

Budgeting – Credit Cards are a good way of keeping a detailed records of your spending.

Security – Once cash is lost, it’s gone. There is no way to get that money back or to keep someone else from using it. If a credit card is lost or stolen you can cancel the credit card account, and get a new card sent to you within a matter of days.

When used responsibly, credit cards help us to buy things we need and pay for them on timeline we determine. If you want to understand how credit affects specific financial or credit needs, talk with a financial advisor before applying for any credit cards. This will ensure that you are making the most informed decision.