How Does a Credit Card Work?

البطاقة الائتمانية

A credit card can be described as a short-term finance from the bank issuing the credit card or credit card issuer.

Unlike your usual bank debit card, which takes money directly from your current account, a credit card uses the Bank’s own money and then send you a monthly bill or statement at a later date. The credit card also protects somewhat against fraud since the bank is a strong counterparty.

In addition, the use of credit rating now in the KSA and GCC is widely prevalent, so using your credit cards in a responsible way and making repayments regularly and on time can enhance your credit rating. Having and maintaining a good credit history will be of great importance in case you need to apply for a car or home finance in the future.

Here are some usual terms that will assist you in understanding how your credit card works:

Credit Limit: is the maximum amount of money you can spend on your card (usually in a month). The card’s issuing bank or provider decides this credit limit. Your current income and liabilities, if any, (as having other cards or finances) etc. are taken into account by the credit card provider when evaluating your financial ability to repay that credit limit to the maximum.

So, if you have a high income relative to your liabilities, you can expect a higher credit limit and vice versa.

Credit Card Balance: is how much you have spent so far on your credit card and is yet to be repaid.

Available Credit: refers to how much credit is left for you to spend before you reach your maximum credit limit.

Billing Period: is a set period during which you can make purchases by your credit card. After this period is over, you will receive a credit card statement (or bill) and usually will have about a month to pay back the amounts of your purchases. You can either pay back all the amounts or part of it. This partial payment is usually the minimum payment, representing 5% of the total outstanding balance.

Statement Payment Due Date: is the date mentioned on your statement (credit card bill) by which you must make payment to the credit card issuer of at least the minimum payment to keep your account in order and avoid any penalties and charges or a block on the further use of the card.

The Minimum Payment: is the amount of your credit card statement/bill that you must pay that month. It is usually a small percentage of the total balance of the statement. If the credit card holder fails repay this amount by the payment due date, the credit card issuer will charge you a late payment fee, and this may also show on your credit report.

Therefore, it is better to pay the amounts due on your credit card in full to avoid paying monthly interest charges.

APR: stands for Annual Percentage Rate. If you choose not to pay your credit card statement balance in full each month, then this is the interest rate which will be applied on the remaining outstanding balance after the statement’s payment due date.

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