The credit card – blessing or curse? That depends on whose hands it is in. It’s time for a detailed description of how credit cards work.
The fact is that credit cards are a double-edged sword: On the one hand, they give us incredible convenience, but on the other, they can be the first step toward a debt spiral. How can you use them to avoid abusing yourself? We will write about that in this article.
What are credit cards and what are they good for?
Credit cards are a tool – one of many payment instruments that has its advantages and disadvantages. If they are in the hands of responsible people who can use them consciously and wisely, the advantages will outweigh the disadvantages. However, if they are used by people who are not in control of their spending and do not control the current state of their finances, then the credit card will be like a razor blade in their hands. It will be difficult to use it and not get hurt at the same time.
The convenience and ease of using a credit card, which is its greatest advantage, is also its greatest curse. People who have fallen into a debt spiral often point to credit card debt as the first stage of their financial problems. But it’s not the credit card that’s bad! Most often, the cause of problems is our behavior and lack of responsibility – only sometimes due to lack of knowledge.
In summary, we would like to emphasize that credit cards are not absolutely good or bad.
What is the difference between a credit card and a debit card?
Bank cards can be broadly divided into three types:
- Debit cards (also called checking cards).
- Credit cards (this is what this article is about)
- Prepaid credit cards
The simplest instrument is a debit card. It is issued as a supplement to your checking account and allows you to pay for purchases without cash and withdraw money from your checking account using an ATM. When using a debit card, we always pay with the money we already have in our account. Thanks to such a card, we have easy access to the funds in the account, which, combined with Internet access, allows us to completely avoid visiting the bank. But if we don’t have money in our account, the card won’t be of much use to us – any attempt to charge it (i.e. make a transaction) will most likely be rejected.
The credit cards we describe in this article work in a completely different way. They are not linked to our personal accounts in any way. They are an independent banking product that is de facto a credit granted to us with a certain limit, e.g. $3,000. When we pay with a credit card, we spend the bank’s money. For such a card, the bank opens a special related account with the maximum balance corresponding to our limit.
How much does a credit card cost?
If we want to use our credit card frequently, it’s worth taking a look at how much a credit card costs. What does account management cost? What do domestic and international transactions cost, and what are the fees for cash withdrawals?
Let’s look at the fees that can be incurred by a credit card or its use:
- One-time fee for the issuance of the main card: this fee can be saved depending on the bank, for example, if we perform a certain number of transactions in the first month after receiving the card.
- One-time fee for issuing an additional card: we can have more than one card issued to one credit card account (e.g. for a family).
- Annual / monthly fee: usually amounts to double-digit euro amounts per year – depending on the type of card and its “prestige”. It can be waived if certain conditions are met, e.g. minimum value or number of transactions. In some banks it is charged monthly.
- Fee for exceeding the card limit: In some banks, we pay only for “hitting” the card limit. If the limit is exceeded, fees are charged everywhere.
- Fee for issuing a replacement card
- Any fees related to collection activities, and these can happen if we are late with payment.
As you can see, you can pay several hundred euros per year just for a credit card. On the other hand, it is possible to negotiate with banks about the amount of fixed fees and reduce them to zero – as long as we actively use the card (for example, as an active customer with DKB). It is worth reading the fee tables carefully.