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How credit cards work

When you apply for a credit card, you apply to borrow money from the card issuer, usually a bank. The issuer will look at your credit history before it accepts your application - and if you have a low credit score you could be refused credit. If you have good credit score and having satisfactory trade records, Banks Generally provides up to 5 times of your monthly Salary.

If all is well, the bank will set a credit limit, which is the maximum amount you can spend on the card. The card company will send you a statement every month, detailing the transactions on the card, plus the amount owing. It should also give the minimum payment and the payment due date.

Increased Spending – As per research on the whole, credit card customers spend 2½ time more money than cash-carriers, making larger purchases that are as simple as upsizing their meal at a fast food restaurant.

More Frequent Purchases – Because credit cards afford shoppers more flexibility, they go out and buy items as soon as they need them. Conversely, cash-only shoppers buy when their wallets are full — paydays and holidays.

Extraneous Purchases – Businesses that receive credit and debit card payments, as opposed to cash-only establishments, reap the benefits of unintended purchases. Because credit card payers are not confined to what they have in their wallets, these buyers frequently purchase items on impulse — like that cute pair of shoes that are on sale.

Additional Credit Perks for Businesses - Knowing how varied payment options affect consumer behaviour, you may wonder how this translates to benefits for your business. Indeed, merchants experience a number of advantages when incorporating credit card payments into their business model.

Unexpected fees - Typically, you'll pay between 2 and 4 percent just to get the cash advance; also cash advances usually carry high interest rates.

Hidden costs - The interest rate is not the only cost of a credit card. A fee will be charged if you are late making your monthly payment, or miss it altogether. You'll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.

And don't be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals.

General Mistakes of Credit Cards users

Debt isn't something that just happens coincidentally or accidentally as you go about your daily living. There are certain spending habits(mistakes) that lead to debt. Recognizing these habits now could save a lot of money and stress later. If you want to stop creating more debt and pay off the debt you have, you must eliminate these bad habits.

1. Spending more money than you make

The logical part of you thinks it's impossible to spend Rs. 1,200 each month when your available amount is only Rs. 1,000. Spending more than you make is easier than you think. So easy, you might be doing it without necessarily realizing it. Dipping into savings, borrowing from others, and using credit are the primary ways of spending more money than you bring in.

You can get away with doing this for a few weeks or months, but soon or later, your hole-digging spending habits will catch up with you. Before you know it, your savings is depleted, your credit cards are fully used out, and you can't borrow any more money.

Keep your spending within your monthly income so that you're living within your means and not creating debt. Reduce your spending below your income and use the extra to pay down your debt.

2. Spending money when you don't have

Spending more money than you make is enabled by spending money you don't have or money you are yet to earn(Generally Students or New to Job employees at Initial career). You spend money you don't have by using credit cards and taking out loans. When you use these instruments to pay bills and make purchases, you're creating debt. If you can't repay the debt each month, it will continue to grow, which will harm your credit score.

You can resolve this bad habit the same way you stop spending more money than you make - by reducing your expenses and relying only on your income to pay for your wants and needs.

3. Using credit for ordinary purchases.

You should use cash to make everyday purchases like groceries, gas, clothes, and entertainment. The appeal of credit cards is the ability to pay later for items that you buy now. The caveat is that you're less likely to pay your credit card bill for items that you've already consumed, which most "ordinary" purchases are. Using credit instead of cash is a bad habit, especially when you don't pay your credit card bills in full each month.

Some credit cards have reward programs that let you earn cash, miles, or points by charging more on your credit card. If you choose to maximize your reward earnings by charging more, only charge what you would have purchased with cash and pay off the purchase immediately.

4. Using credit when you have cash

Another bad habit that leads to debt is choosing credit over cash when you actually have the cash. You might want to get the goods (or services) without having to pay for them, but the convenience of holding on to the money in your wallet comes at a cost. Chances are, if you don't want to pay for it today, you're not going to want to pay for it tomorrow.

To change this bad habit, you have to be willing to pay for what you want with the money you've earned. Realize that while you can postpone payment by using credit, you'll end up paying more than if you'd just spent your own cash.

5. Using debt to pay off debt

When you use credit cards to pay off other cards and loans to pay off other loans you're not paying off anything. You're just shuffling your debt around and incurring more debt each time you do so. Balance transfers have transaction fees and most loans have some kind of down payment or origination fee. So when you use debt to pay off debt, you end up worse off than when you began.

Using debt to "pay off" debt might be beneficial if you can transfer a balance from a high interest rate credit card to one with a lower limit. However, you have to be careful that the balance transfer fee doesn't negate the interest savings and that your post-promotional interest rate isn't worse than your previous rate. Transferring a balance once or twice to take advantage of a great rate is different from continually transferring balances to dodge credit card payments.

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