Credit Cards: Features, Advantages & Uses

What is a credit card?

A credit card is a payment tool issued by banks or other financial institutions that allows you to borrow money up to a set limit and pay for goods and services. Credit card usage has surged in recent years but how do credit cards work? Normally transactions are added to your card balance, and at the end of your billing cycle, you’ll receive a statement with the total amount you owe. At this stage, you can choose to pay the full balance, which avoids interest charges. Alternatively, you can make a minimum payment, with interest applied to the remaining balance. Many credit cards also come with certain features, such as rewards or cashback. When it comes to online purchases, there are virtual credit cards, providing the same benefits, but without the physical card. They offer an extra layer of protection, as they generate temporary card numbers that can be used for specific transactions.

How to get a credit card?

Getting the right credit card requires careful consideration, so it’s best to take your time when exploring different options. Before applying, it’s important to check your credit score, as this can affect the type of card you’re eligible for. While a higher score might give you access to cards with better rewards, a lower one might mean you’ll need to consider cards designed for building credit. Choosing a suitable credit card will depend on how you plan to use it. For example, if you’re a frequent traveller, you may want to learn more about travel cards. These types of cards normally offer perks like airline miles and travel insurance. However, if your priority is to save on interest, opting for a zero percent credit card might be a better idea. This way, you’ll get an introductory period where you don’t have to pay interest on purchases or balance transfers for a set amount of time. Therefore, 0% interest credit cards can be helpful in managing large purchases or transferring existing debt without incurring additional cost. As for your broader private and wealth management, it’s advisable to integrate credit cards into a well-rounded plan. UniCredit is committed to optimising your financial outcomes and securing your legacy by offering tailored advice, based on your unique circumstances.

How to use a credit card?

It’s crucial to use your credit card responsibly, as this can be an effective way to improve your financial stability. If you pay off your balance in full each month you’ll avoid accumulating debt. This approach will help you build a solid credit history, which is essential for many financial decisions, from applying to a mortgage to retirement planning. Always monitor your spending to ensure you’re getting the most from your card and taking advantage of the benefits it offers. Maintaining a good balance between spending, saving, and managing debt will keep your cash flow steady so that you can allocate more money towards long-term savings.

Is it better to use a credit or debit card?

A debit card enables you to withdraw directly from your account, reducing the chance of overspending. On the other hand, credit cards tend to offer more versatility and convenience, as you’ll be able to make purchases, even if you don’t have enough funds in your account. Credit cards also offer more security in some cases with fraud protection. There are also other times you may want to apply for personal loans instead, especially if you need to manage unexpected expenses that exceed your available credit limit. Unlike credit cards, personal loans come with fixed interest rates and monthly payments, making them a more predictable form of borrowing money.

What happens if I don’t use my credit card?

If you don’t use your credit card for a long time, it may have a negative impact on your credit score. Creditors often look for activity to assess your creditworthiness. You may need to continue paying your annual fees, even if you’re not using your card. Additionally, credit card issuers may even close your account after an extended period of inactivity. This is why it's strongly recommended to keep track of all your credit cards and consider cancelling any you don’t need anymore. The process typically involves contacting the issuer and requesting cancellation of your credit card, by phone, in branch or online. However, before cancelling, remember to pay off any remaining balance or use a credit card balance transfer to move your debt to a new card, so that you avoid additional fees.

Are there any disadvantages to a credit card?

Although credit cards offer many advantages, there are also a few drawbacks to be aware of. One of the main concerns is the risk of accumulating high-interest debt, if balances aren’t paid in full every month. Consequently, this can make your purchases even more expensive in the long run. To mitigate this risk, you should only use your credit card for what you can afford to repay. Another potential disadvantage is the temptation to overspend, which can lead to financial strain. It can be beneficial to set a budget, keep a close eye on your transactions, and limit the use of your credit card to planned, necessary purchases. Bear in mind that you can withdraw cash from a credit card, but you’ll typically incur higher interest rates, which start accruing immediately. Credit card fraud can also be a major issue, so it’s vital to always stay vigilant by reporting any suspicious activity that you may encounter. If you’re looking to apply for a credit card, carefully weigh the benefits against the potential drawbacks to determine whether it fits with your financial situation.