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The Good, Bad and Ugly of Credit Cards

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According to global estimates, the quantity of credit cards in circulation in the Middle East and North Africa region is going to surge 51 per cent by 2008 as the number of these cards reached 6.23 million in the year 2006. In reality, we are all embracing the idea of plastic cards, if the majority of us haven’t already! A Credit card is becoming the most popular form of payment all over the world as it is a mechanism of paying purchased items without even having cash in your bank account; it allows consumers instead to revolve their balance at the cost of having interest charged. Now, almost every merchant accepts this form of payment, even hairdressers and medium/small-size markets have Point of Sale systems. However, this luxury does not come free or cheap.

How to Obtain a Credit Card?

Credit card lenders ask you to fill out an application that includes information about you such as the card you are interested to obtain, birth-date, whether you are a customer of theirs and your monthly income. They require this information to make sure that you are able to afford the credit you are taking on and that the credit limit they give you is a reasonable one. The less details you put in your application form, the lower your credit limit will be. Nowadays, several lenders offer value-added incentives to encourage customers to get credit cards from them such as cashback on air tickets, supplementary cards for family members’ and chances to win prizes such as jewellery when a certain amount is spent on the credit card.

How Does a Credit Card Work?

When buying an item with a credit card, the merchant checks through an Electronic verification system or Point of Sale system connected to the approval network to see if you have sufficient credit to cover the purchase or if you have exceeded your limit. After the merchant verifies this information, you will be given two printed receipts, one for you to sign and the other to keep. The merchant deposits the receipt with their bank which sends this transaction electronically to the credit card company which continues the transaction by crediting the bank and then charging the issuer of the card. Afterwards, the card issuer finishes the transaction cycle through sending a statement to you for the purchase amount.

How Do Interest Rates on Credit Cards Work?

Nowadays, issuing banks have grace periods ranging from 20 till 55 days depending on the type of credit card. If you pay your account before the end of the grace period, you will not be charged any interest from a period of interest free credit. If you are late in paying the balance, finance charges will be calculated. With most credit cards, a grace period does not apply if there is any outstanding balance from a past billing cycle or statement. Interest will be incurred on the previous and new transactions. Depending on the issuer, some credit cards will only apply charges on the old balance only.

How to Repay your Credit Card Balance?

Credit cars issuers ask you to repay your balance with minimum monthly repayments (MMRs) that usually ranges from 2% to 3% of your balance. The MMRs will be shown clearly in your credit card statement offering you the flexibility to repay as much of your balance as you choose. However, you should keep in mind that the longer it takes you to repay your balance, the more interest you will pay. It is worth mentioning that you can repay your balance any time of the month without having to wait for your monthly statement.

Is it Really as Simple as it Seems?

As appealing as plastic cards may seem, they are not without risk. Cash withdrawals and credit card cheques do not qualify for the grace period as interest is charged from the instant you make the withdrawal and use the cheques. Financial experts urge consumers to think twice before withdrawing cash using a credit card due to the high interest rates incurred. Nowadays, the average yearly percentage rate on credit card cash borrowing has risen to 23.48%, meaning that if you withdraw AED744 from a cash machine using a credit card, you will be charged AED193.37 a year! Using a debit card for cash withdrawals is almost always the safest and best way and if you had to use the credit card for borrowing money, make sure to clear the balance as soon as you can to avoid high interest rates.

A credit card is a two-edged sword, with sure advantages exceeding the disadvantages contrary to what the majority thinks. Credit cards enjoy better security and protection on your purchases compared to any other form of payment so enjoy the luxury and convenience this magical card offers.


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