Why do you need a credit card?

If you are wondering what a credit card is for, then you have come to the right place, as we will solve this and other doubts on the subject.

Wondering what a credit card is for is something that, most probably, you will ask yourself at some point in your life, and, although banks are not really interested in informing their customers about its use and all the possibilities available with a plastic, here we will answer several questions on the subject: What is it for? How long has it existed? What basic terms should I know?

When did credit cards begin to exist?

According to historians, their origin dates back to the beginning of the 20th century in Western Europe, especially in France, England and Germany, although with a very limited application, having subsequently spread and taken off in the United States in the 1960s.

The emergence of the credit card is linked to the development of commercial activities, the rise of the consumer society and mass contracting, and also as a means of avoiding the use of cash and simplifying consumer activities.

It emerges as an instrument whose presentation makes it possible to defer payment obligations in certain transactions. The display of the card will entitle the cardholder to dispose of goods or services without immediate delivery of cash.

What is a credit card used for?

A plastic of this type is used to access revolving credit (so called because it can be used repeatedly) and to use it in stores that accept this means of payment, i.e., the credit card. In this way it is not necessary to disburse cash.

How does a credit card work?

Simply show your credit card at the cashier’s desk and sign a promissory note (also known as a voucher) for the amount of the purchase, although some credit cards require a PIN.

The card issuer will then pay the merchant the amount of the purchase on behalf of the customer (after deducting a percentage of the purchase). Subsequently, the amount owed by the cardholder must be paid to the financial institution, which may offer different deferred payment schemes with and without interest for financing.

The establishments that accept credit cards are affiliated to one or more of the transaction processing networks operating in the world, such as Visa, MasterCard and American Express: Visa, MasterCard and American Express.

The largest network is operated by Visa and cards issued by its affiliated banks are accepted at more than 30 million merchants in over 200 countries and territories worldwide. The networks are responsible for processing transactions and guaranteeing the operation of credit cards globally.

How are payments made for credit card purchases?

Each month the bank issuing the credit card sends an Account Statement summarizing the purchases, cash withdrawals, commissions and credit payments made from the initial cut-off date to the final cut-off date.

It also indicates the deadline for payment, the minimum amount to be paid on the payment date and the amount to be paid to avoid paying interest, among other informative data.

These are the basic concepts you should master

To avoid surprises and to understand the concepts you will find in your account statement, we recommend that you read the following carefully:

  • Minimum payment: It is determined by taking a fixed percentage of the balance owed at the cut-off date. The minimum payment fluctuates between 5% and 10% of the balance owed and is the minimum amount you will have to cover to keep your credit current. However, it is a good practice to pay off either the total amount of the debt or an amount greater than the minimum payment to prevent the debt from increasing considerably with the collection of finance charges.
  • Interest (finance charges): Financial institutions charge interest on financing when the balance is not settled in full at cutoff. The bank calculates the average daily balance due and multiplies it by the interest rate stipulated in the credit card contract. Credit rates are generally stipulated on the basis of the rate published at the date of calculation. Banks may charge higher rates to customers who demonstrate erratic payment behavior and who may be riskier.
  • Cutoff Date: Day of the month that the bank uses to calculate your debt, minimum payment and interest, which appears on your statement. For example, if the cutoff date is the 30th of each month, the statement will show all the purchases you have made with the card from the 1st to the 30th of the current month, the previous balances will be added to these purchases and the minimum payment and interest to be paid will be calculated.
  • Credit Limit: This is the maximum credit limit that the bank grants you and that you can use on your Credit Card. It is determined by your income and your payment capacity (income minus your obligations) and is assigned when you sign up for the card. The bank may make adjustments to the line according to the user’s behavior.
  • Balance at cutoff: This is the amount owed updated to the cutoff date (when the account statement is issued). Any transactions made after that date will be included in the next statement. It is the result of adding your previous balance, your purchases made during the month and subtracting the payments made during the period.
  • Non-interest bearing payment: This is the amount you have to pay to avoid finance charges, if you do not have a previous balance, it will coincide with the total purchases made during the month. By paying this amount, you will have used the card financing from the previous cut-off date to the current cut-off date without paying interest.
  • CAT: Total Annual Percentage Rate, are all the costs that are implicit in the use of the card represented in a percentage that serves to compare how expensive a card is compared to its competition. In its calculation, the interest rate, the annual fee and any commission charged by the bank for the use of credit are used.

Now that you know what a credit card is for, you may be thinking of applying for one, we recommend you to take our compatibility test and find the one that best suits your usage pattern. In addition, we suggest you read the information on our blog and especially this post in which we give you tips to use your credit card wisely.

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