A credit card is a plastic or metallic card that allows you to borrow finances from your issuer. It resembles a debit card, although its operation is slightly different. A debit card allows you to use your checking account balance, and sometimes savings accounts. When you use your credit card, you have to repay the debt at the end of the month. We shall see how to pay off credit card debt when you have no money shortly.
It is essential to pay a credit card debt on time to maintain your reputation with financial companies. Late payments affect your overall scores to a large extent. When you look at how credit bureaus calculate FICO scores, you realize that your payment history contributes about 35% of your overall scores. If you establish good repayment behavior, you will maintain good scores as financial companies will always report positive payments to the bureaus.
Credit bureaus are bodies entrusted by the federal government to receive information about borrowers from various financial companies and keep them for future reference. The bureaus use various pieces of information to come up with FICO scores, and a credit report for every borrower reported to them. We have three main score calculation bureaus in the United States. They include Experian, TransUnion, and Equifax. Each one of them is independent of the others.
How do credit cards work?
If you are new to credit cards, you must wonder how they operate. For your understanding, credit cards allow you to borrow finances from your issuer. Different credit cards give you different borrowing limits depending on your scores when applying for an unsecured credit card or security deposit when applying for the secured ones.
Unsecured cards require you to have a borrowing history to get them. Again, as I have mentioned above, the number of scores determines the card you can get. There is a card for bad, another one for fair, good, and excellent. A credit card with bad scores will have a low borrowing limit and high-interest rate compared to the one with good-excellent scores.
You should make a security deposit to borrow money from your issuer for secured credit cards. Usually, you borrow against your deposit amount, which means that the more your deposit, the higher your credit limit and vice versa. You can apply for a secured credit card to rebuild your credit. The cards are suitable for those with no borrowing history. You can also ask for a secured credit card to grow your scores to good numbers if you have bad scores.
As you use your card for various transactions, your issuer reports your card usage to the credit bureaus. The reporting happens every month. That means if you use your card well, you will be able to get a good report and score. The details are then available for future use by other institutions when you apply for a loan or line of credit.
After the end of the month, you have to repay your debt and borrow again. Credit card debts require you to repay them with interest on top. The interest rate is usually the profit that the financial companies get from issuing you the card. Of course, there are other ways they generate money from your card usage, such as the late payment fees, foreign transaction fees, cash advance fees, balance transfer fees, etc.
Who issues credit cards?
You can get credit cards from banks and credit unions. There are also financial technology companies that issue credit cards. A good example is Chime which issues the Chime secured visa credit card.
To get a credit card, one has to submit their application to the card issuer to review their application to approve or deny the request. When applying for an unsecured credit card, the issuers usually contact a hard credit inquiry to check your scores. The credit scores show your creditworthiness. In short, they show your ability to repay a given loan.
The unsecured credit card issuers do not have to contact a hard inquiry because you have a security deposit. They only need to match your deposit with the proper limit, and you are good to go.
Can I get a credit card for bad scores?
You can get a credit card with bad credit scores to restore your lost glory. By the way, some financial companies give instant credit card approval for bad credit with no deposit. They do not mind contacting a hard inquiry. After all, you already have bad scores, and since the cards are for people with poor scores, you can easily get them.
However, the best credit card for building scores is the secured credit card. As I mentioned earlier, the cards allow you to deposit money in your card account, then borrow against it. Your card issuer reports your card usage to the bureaus as you use your card. With time, you can build scores to qualify for unsecured credit cards. Your deposit then becomes available for use in your account.
How do I repay my credit card debt?
Once you spend your limit, you have to repay it at the end of the agreed period, generally every month. A credit card debt revolves in that you can borrow again once you repay your debt.
You can repay your debt using your bank account, which transfers money to the card account to settle your debts. Some issuers require you to have a checking bank account so that they can automatically deduct your debts every month.
How to pay off credit card debt when you have no money
If you have a credit card and rates are increasing day and night, you must be worried about how you will pay your debt. Remember that the more you stay without repaying your loan, the more your debt increases due to the fines you have to part with. According to the research I have done, there are three main ways you can utilize to repay your loan. They include the following.
1) Use a balance transfer credit card
A balance transfer credit card allows you to transfer debts of another card to pay off the debts at a lower interest rate. Usually, balance transfer credit cards charge you 0% APR when repaying your old card’s debt for a particular duration, ranging from a few months to two years.
Normally, the balance transfer credit card issuer pays off the balance on the other card and transfers it to the new card, after which you repay it without interest. You can clear your debt from your old card without money by getting a balance transfer card.
You may get a grace period from your new card issuer before you start repaying. For your understanding, transferring your debt from one card does not mean that the old card becomes unuseful. You can still go to it later when you have settled your debts. However, you should never borrow when paying your debts to make things easy.
2) Borrow money
You can borrow money from your friends and relatives to repay your card’s debt and return later.
3) Get a personal loan
Even though it is not advisable to pay loans with other loans, you can get a personal loan to repay your card’s debt.
What are the differences between credit cards and debit cards?
The two cards appear the same physically. However, they are different in the way they operate. The differences between credit and debit cards include the following.
- Credit cards allow one to borrow money from their card issuer, while debit cards allow you to use the checking account balance.
- You must either have a borrowing history or a security deposit to get a credit card. In contrast, anybody can get a debit card if one has a checking account.
- When you use a debit card, you must part with some interest rate, while debit cards allow you to use them for free.
- Credit cards require you to be over 18 years to get them, while people below 18 years can get debit cards. These include school-going kids and college students.
However, despite having several differences, the two cards are similar in various ways. First of all, the cards have card numbers, expiry dates, and CVV. The details are essential when making payments online. Furthermore, the cards allow you to buy goods and services at places that accept card payments. Moreover, the cards are either plastic or metallic.
Another way the cards share similar features is that you can use either of them to withdraw money at an ATM. However, credit card issuers charge hefty fees when you use your card to withdraw finances from an ATM. It is free to withdraw money at an ATM using a debit card. That is if you are using on-network ATMs with most financial companies.
Bottom line
Credit cards resemble debit cards in their physical appearance, although the two differ in how they operate. Debit cards allow you to use your checking account balance, while credit cards allow you to borrow finances from your issuer. You can utilize credit cards to buy goods and services from places that accept card payments. You must repay your credit card debt at the end of the billing period to continue borrowing with the card.
