How credit cards work (how to make it work for you)

Tips to help you avoid interest charges and other fees

Credit cards vs debit cards

  1. A debit card is what a lot of us refer to as an ATM card. A credit card is a ‘loan card’.
  2. A debit card is linked to your bank accounts such as your checking account or savings account. A credit card is not linked to your account.
  3. While using a debit card, you spend money that belongs to you. The money is in your account. While using a credit card, you use money that belongs to the bank. They’re loaning it to you.
  4. If you make a purchase using your debit card, you won’t pay interest. If you make a purchase using your credit card, you will be charged interest if you don’t pay back before the due date. Remember it’s a loan. More on this later.

How credit cards work

When I moved to Dubai, I had zero experience on how credit cards work. Come to think of it, I had never heard any of my close friends, family or colleagues mention their experience with credit cards.

Credit card numbers/statistics

Here are 3 worrying statistics from to consider before I explain how credit cards work:

  1. The average credit card holder has at least 4 credit cards.
  2. More than 189 million Americans have credit cards.
  3. The average credit card debt per household is about $8,398.

One thing to note is that a lot of people don’t read the document the bank gives you when the card is delivered. The bank also doesn’t give you accurate and specific information about the terms. This is a deliberate move as they’re in business and their aim is to make sure they earn as much money from you through the interest rates as possible.

That is not to say that you should write off the idea of applying for a credit card.

Application of credit cards

Since from my experience and research I have established that a lot of people don’t read the terms and conditions on their cards and a lot of people aren’t financially literate, here is a list of questions you should ask your bank before getting a card:

1. What is the due date?

My bank app shows me when my payment is due. It also shows the minimum payment due. This is an important date as missing a credit card payment means you’ll be charged a late fee, on top of your interest charge. The bank could also charge you a higher interest rate.

2. How long is the grace period?

If you’re really good at managing your money and paying off your bills on time, the grace period is heaven for you.

Let me tell you how the visit to the bank went…

First of all, he wasn’t very enthusiastic about explaining the process to me. I felt like I was being a nuisance yet I’m their customer. But I wasn’t shocked because if we get to know how credit cards really work, especially about the high-interest rates, then the banks will lose money.

What is the difference between Minimum and Maximum payment?

Credit Card Minimum payment

A minimum payment is the smallest amount out of what you owe that the bank requires you pay each month. When you apply for a credit card, this is usually the default setting on your card, which is a dangerously low amount. It can be as low as 2%.

Let’s use an example…(How Credit Cards Charge Interest)

If I spent $400 using my credit card in July, I’d be required to pay only $27 on the due date. 5% of 400=20, but $27 is higher as explained above.

Because the minimum payments are tiny relative to the total bill, paying this amount just maximizes the interest payments over time. Credit card companies even make it hard to commit yourself to paying the card off in full each month. — Nudge by Richard Thaler and Cass Sunstein

Credit Card Maximum payment

This means paying your credit card debt in full every month. If you spend $400 in July, you pay $400. If you spend $700 in August, you pay $700.

People tend to be mindless, passive decision-makers. Credit card companies take advantage of this fact. Our choices depend on how ideas or problems are presented to us. Otherwise, why would you accept to pay $25 per month knowing very well you spent $500? They have presented the minimum payment as a relief to you while banking 18% (or more) in interest from you. — Nudge by Richard Thaler and Cass Sunstein

Watch this 3-minute video for an explanation of the deeper cycle of credit card debt.

Back to the questions you should ask your banker…

3. Is there a monthly and/or annual fee?

One of the reasons that convinced me to finally get a credit card was because my banker mentioned that they were offering a ‘Free for Life’ card. Since I don’t trust financial institutions, I had to confirm that with 3 people lol. And read the terms and conditions document that came with the card before signing to ensure that it was true.

4. Is there a joining fee?

Yup, some banks charge you a joining fee. Which is crazy because they’re literally selling you debt. I wouldn’t sign up for such a card.

5. Which other fees are charged on the card?

A month after signing up for my card I learnt that there’s a 0.99% per month of the Credit Card outstanding insurance fee. They didn’t tell me this just like they don’t tell you about all other fees. And again, it was a default choice already made for me!

Ensure that you read, reread and understand the terms and conditions document that they give you. They include all fees and terms on it but because most people just live mindlessly and don’t read, we end up signing up for stuff we don’t understand.

How I use my credit card

This is where I issue a warning.

1. I use my card to pay all my bills

I have a budget that I stick to. From my budget, I know where my money should be going every month.

2. I make maximum payments every month

There was no way I was going to choose the default minimum payment option and end up stuck in debt for years and also enrich my bank through the crazy interest rates.

3. My payments are automated

I don’t wait until last minute to ensure there’s money in my checking account to pay my credit card. I also don’t walk to the ATM machine or bank branch to make the payment.

4. I only spend money that I have

I don’t spend more than I have in my checking account. If I want to pay $300 using my credit card, I check to ensure that I have the same amount in my checking account. And again, I stick to my budget because remember that credit card money is a loan! It doesn’t belong to you.

5. I read my statements every month

For three months, I’d call my bank to ask them questions about any fees or concepts on my statement that I didn’t understand.

6. I don’t exceed 30% limit

My credit card limit is three times my monthly salary. That’s a load shit of money to have access to every month.

Credit cards always mention the minimum payment you can make when you receive your monthly bill. This can serve as an anchor, and as a nudge that this minimum payment is an appropriate amount. Similarly, credit card limits, which are nominally in place to limit spending, may serve as high anchors that actually encourage spending. Credit card companies even make it hard to commit yourself to paying the card off in full each month. — Nudge by Richard Thaler & Cass Sunstein

7. I use it to grow my credit score

Maybe one of these days I will need a big business loan so it’s prudent to build my credit score in the meantime. Always be prepared.

8. I’m here for the reward points and discounts!

Yeah, I also want to dine in fine restaurants and fly to my dream destinations on a bargain!



Your voice of reason before you blow all your money this weekend!

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