Understanding Credit Cards And How They Work

Credit cards are one of the most popularly used modes of payment. It is so frequently used for pretty much all kinds of transactions, online as well as offline. A credit card is a thin rectangular piece made of either metal or plastic that is issued to cardholders by your financial institution. They let you buy products and services by allowing you to borrow money from the bank. Hence, they can be used to buy products when you’re short on cash in your account at the moment and pay your bank at a later pre-determined stage. The only aspect that you must be aware of is not to exceed the period of time allotted by your bank to pay back the monthly credit card bills. 

Credit cards can be beneficial in many ways but you should know how to use it effectively without falling into debt traps. If you fail to pay the bills on time, you could majorly affect your credit scores and fall into grave trouble especially while taking out loans. 

Must keep in mind that your credit payment history is communicated in detail by your bank to the credit bureaus which are recorded and examined by the bureau in order to ascertain your credit worthiness. Utilizing your credit scores responsibly ensures improvement in credit scores. 

The most crucial aspect that one must remember is to invest in a credit card that suits your expenditure and spending habits. One must make it a point to read all the terms and conditions that come along with owning a credit card. Every credit card issuer has different terms regarding payment terms and details associated with it. 

While choosing a credit card one must be well informed about the different kinds and various terms and benefits associated with it. There are different kinds that you should be acquainted with ones that are secure and ones that are unsecured. More importantly, you must know that the secured credit cards come with a required deposit of a certain sum of money prior to obtaining the card. Once you start using the credit card, the initial money that has been deposited will be reimbursed to you. The benefit of having a secured credit card is that you don’t have to worry about it affecting your credit scores. 

On the contrary, unsecured credit cards do not demand any sort of initial deposit but hugely impact your credit scores. As you make payments on a timely basis the credit score will be positively impacted and if you delay the payments on your credit bills it will negatively impact your credit scores. There are various types of unsecured credit cards, the popular ones are student credit cards, reward credit cards, business credit cards, and a lot more. 

What exactly is a credit score?

A lot of individuals are not aware as to what is credit score. To put it simply, credit scores are determining factors utilized by your bank to ascertain whether you would be repaying a loan within the time period allotted or not. Therefore, it is to measure your credit worthiness. On a general scale, credit scores range from 300 to 850. 

When you have a better credit score then banks will be quite quick in processing your loan requests and get approved easily.

Aside from knowing your credit score, you must always be aware of the specifications and variables through which it is calculated, the main variables that are used when calculating a credit score are as follows:

  • Payment history(35%) - Ensure that you go through your credit history to make sure you haven't missed out on any sort of prior payments.
  • Current debt(30%) - You are required t check the sum of money you owe and check whether you haven't used up the existing available credit limit. 
  • Types of credit (10%) - Estimate the type of debts you have like is it home, auto or others.
  • Length of credit (15%) - This is to know whether you have owned a credit card before or is this your first time. 
  • New credit (10%) - It allows you to find out if you have applied for loans in the past or if this is a new one.

Credit Score Ranges

As clarified earlier, credit scores vary from 300 to 850, here is a division of how it has been segregated

750- 850 

This suggests that you have a really good credit score as this is the highest range in credit scores, you don't have to panic about getting your loans approved when you have a credit score of 750 above as your loans will be approved easily and quickly. Having a high credit score gives the bank a guarantee that you will pay up your loans and money borrowed within a limited period of time.


This indicates a decent credit score and you can be assured that your loans will be approved when you apply for a loan. More importantly, you will be charged with a comparatively lower rate of interest. 


If your credit score falls under this category, it indicates an average credit score, you can look into various methods of improving it. Although the chances of a loan getting approved are high they can take a while for it to get approved.


If you happen to apply for a loan being in this credit score, the chances of it getting approved are slim. In case it does get approved after a grueling amount of time, it will have a really high rate of interest attached to it. Hence, if you fall under this credit score category, it is extremely crucial that you work towards improving it. 

600 and below

Anything below 600 is a danger zone and is not at all beneficial to have a credit score of 600 and below. Your chances are very low of any loans getting approved. By a stroke of luck if they do get approved you will be charged a very high interest rate. This is a warning sign and you must by all means try and increase it. 

How can you improve your credit score?

Understanding the factors pertaining to credit scores is very crucial for the process of increasing it. Some of the main factors that help improve credit scores are:

  • Credit age
  • Payment history 
  • Multiple inquiries for loan simultaneously
  • Imbalance in the debt to income ratio 

In addition to these factors, always pay attention to your credit card bill payment details and make sure you pay your bills in a timely manner. Tracking your credit scores consistently is also a good idea to see if there are any fluctuations in it. Make certain the credit scores are updated regularly because this may pose a problem when you apply for a loan. 

Avoid applying for multiple loans at one time, you will fall under reasonable suspicion and this will raise questions regarding your ability to pay back. 

The bank will report you to the credit bureaus in case you’re unable to make the payments in a certain fixed timeframe. In order to increase your credit scores, you will have to be punctual and pay on time. 

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