Credit Card Explained: What It Is, Types, How to Use It, and More 

You may already have an idea about credit cards. In fact, you may be considering getting one. Otherwise, you wouldn’t be reading this article.

However, your lack of working knowledge about cards may be keeping you from actually getting one. After all, what we don’t fully know often scares us or makes us anxious. Add to that the credit card horror stories you may have heard from family and friends.

If you’re a credit card newbie, this article’s for you. This credit card 101 guide will show you both the practicality and pitfalls of this spending tool.

A Brief Credit Card History

The invention of the modern credit card is usually credited to a businessman named Frank McNamara. Frank was dining at a restaurant, but when he was about to pay the bill, he realized he had left his wallet at home. This incident inspired the idea behind the contemporary credit card.^[1]  

Frank and his business partner, Ralph Schneider, then started the Diner’s Club. The said club offered cardboard cards that people could use as a charge card at partner restaurants. With the card, customers would just have to pay the restaurant bill in full monthly.

Credit Card 101: Credit Cards in the Philippines Explained

A credit card allows you to instantly borrow money from the bank or credit card company with the condition that you’ll pay it back on the agreed-upon date. In a nutshell, it gives you the ability to buy something now and pay for it later.

💳 How Do Credit Cards Work?

Each credit card comes with a credit limit, which is the maximum amount of money that you can borrow. Every time you buy something using your credit card, the cost of your purchase will be subtracted from your credit limit. This means that every time you use your card, your available credit goes down.

For you to understand it more easily, take a look at this example. Let’s say you have a credit card with a ₱10,000 credit limit, and then you buy a pair of sneakers worth ₱2,000 using your credit card. After the purchase, your available credit will be ₱8,000. 

The money that you owe the bank is called “balance.” Using the example above, your balance is ₱2,000. 

However, your credit limit will revert to normal after you repay your balance. So once you pay the ₱2,000 balance (plus interest and other charges), your credit limit will be back to ₱10,000 again.

💳 How is a Credit Card Different from a Debit Card?

The process of using a credit card and a debit card is almost the same. The difference, however, lies in the source of funds. 

When you use your credit card, you’re borrowing against your credit line, which is essentially the money of the bank. But when you use your debit card, you pay with the money in your savings or checking account.

💳 What is a Credit Card Best Used For? 

Use your credit card for everyday purchases. When your monthly statement comes, you can easily track your spending and adjust your budget accordingly. You can also use it for purchases that require a bigger amount of cash than you're comfortable withdrawing and carrying around.

These various types of expenses include but are not limited to the following:

• Appliances and furniture
• Home and personal electronics
• Online shopping
• Flights
• Hotel and travel-related expenses
• Groceries
• Fuel 
• Digital subscriptions (e.g., Netflix, Spotify, and YouTube Premium)
• Bills payment
• Insurance premium payment
• Dining

Note, however, that it's best to use your card only if you have enough funds in your bank account to back up the purchase.

What are the Types of Credit Cards?

Not all credit cards are created equal. With that, you need to find out which card will likely work with your lifestyle and spending habits. 

Here are the basic types of credit cards: 

📌 Rewards Credit Card

Rewards credit cards, explained simply, are cards that reward you every time you spend using your credit card. Usually, rewards come in the form of points. Depending on your bank, you can exchange these points for air miles, gift certificates, and other items. 

Rewards credit cards are perfect for those who always use their credit card for various purchases and fully pay their balance on time. 

📌 Cashback Credit Card

Every credit card 101 guide should cover cashback credit cards. Compared to points-earning cards, cashback credit cards have a more straightforward system: they give back a percentage of the money you spend using your card. 

Some banks offer as much as 5% to 8% cashback. It’s also worth noting that different spending categories have different cashback rates. For instance, grocery spends may offer bigger cashback compared to dining purchases. 

Read more: Cashback vs Rewards Credit Card: How to Choose the Better Option

📌 Corporate Credit Card

Corporate credit cards are designed for companies and other businesses. They function like regular credit cards, but they’re specifically issued to employees. Employees then use it for business-related purposes, such as client dinners, trips, supplies, and more. 

📌 Premium Credit Cards 

Often the bank’s most exclusive offerings, black credit cards are issued to high-income earners. They come with high credit limits and features not offered to regular cardholders. The latter may include complimentary airport lounge access, generous rewards points, discounts at partner establishments, and free travel insurance, among others. 

📌 Air Miles Credit Card

One fact about credit cards is that they’re usually used for booking flights. For that reason, some banks offer cards that let users earn miles fast. Air miles credit cards may even come with travel-related perks, such as airport lounge access and travel insurance. 

📌 Co-Branded Credit Card 

Banks and certain brands collaborate to create co-branded credit cards. If you have this card, you gain exclusive access to the partner brand’s perks and rewards. 

Some examples of co-branded credit cards in the Philippines include the UnionBank Lazada Credit Card, Petron BPI Card, Metrobank Toyota Mastercard^®, RCBC Mango Mastercard, and RCBC Zalora credit card, just to name a few. 

📌 Secured Credit Card

Regular credit cards don’t require applicants to provide any collateral. Secured credit cards, on the other hand, will require you to provide collateral in the form of a cash deposit. The credit limit of a secured credit card is dependent on your deposit. 

Wondering which type of credit card suits your needs and lifestyle? Compare your options below and apply via Moneymax:

Credit Card	Best For	Key Features
UnionBank Rewards Credit Card	Rewards	1 point per ₱30 spend 3x points for shopping and dining locally and abroad
Metrobank Platinum Mastercard®	Dining	Up to 50% off on dining deals 1 rewards point for every ₱20 spend
BPI Rewards Card	Beginners	Low income requirement of  ₱15,000 Low annual fee of ₱1,550 (waived for the first year)
UnionBank Lazada Credit Card	Online Shopping	₱6 Lazada Credits per ₱200 spend at Lazada ₱1 Lazada Credit per ₱200 spend elsewhere Free monthly shipping of up to ₱50  Free discount vouchers worth ₱500
Petron BPI Card	Fuel Purchases and Auto Services	3% fuel rebate at participating Petron stations nationwide Free ₱200 fuel voucher for first-time cardholders

Read more: Get More Bang for Your Buck: 32 Best Credit Cards in the Philippines

How Do You Use a Credit Card?

Before you buy something, make sure the store accepts credit cards. Once you’ve confirmed this, here’s what you need to do:

👉 At Physical Stores 

At the cashier, you’ll be asked to insert your card into a card reader. Other machines may just require you to swipe or tap your card.

👉 At Online Stores

On the online shop’s payment page, you’ll be prompted to input the following credit card details: card number, expiration date, and the security code (found on the back of the card).

Do Credit Cards Come With Fees and Charges? 

One of the most important things to know about credit cards is that they come with an assortment of fees. Consider these charges before filing your credit card application as they may affect your monthly budget:

💸 Interest

Credit card interest is the fee that the bank charges you for borrowing their money.^[2] Some banks, however, offer zero-interest credit cards. If you happen to get such a card, you’ll enjoy the privilege of not paying the interest on purchases charged for a specific period.

💸 Annual Fees 

This is the credit card membership fee that you pay every year. The amount remains the same no matter how often or rarely you use your card. Some banks, however, may waive the annual fee on select credit cards. 

Read more: Save Money With These 33 No Annual Fee Credit Cards for 2023

💸 Cash Advance Fee

When you withdraw cash from the ATM using a credit card, the transaction will cost you ₱200.^[3]

💸 Late Fees 

Learning how late fees work is key to understanding credit cards better for beginners. If you fail to pay the minimum required balance by the due date, the bank will charge you a late fee. Make sure to pay your balance on time. 

💸 Overlimit Fee

The bank charges a fee when you spend beyond your credit limit. This is called the overlimit fee. In cases where the bank doesn’t charge an overlimit fee, your card will be declined when you exceed your credit limit. 

💸 Foreign Currency Transaction Fee

When you use your credit card during your travels abroad, you’ll need to cover this fee. You’ll be charged a percentage of your purchase amount plus an assessment fee from the credit card network (e.g., Mastercard and Visa).

💸 Gambling Fee

Planning to use your credit card for gambling activities, such as lottery and online betting? Your bank will charge you with a gambling fee. Some banks also include cryptocurrency and other cash-like transactions in the charge. 

There are more fees to consider, so we encourage you to talk to your bank to learn more about them.

What are the Advantages of Owning a Credit Card?

One cannot deny the top advantages that this plastic card offers:

👍 Convenience

One of the most obvious facts about credit cards is that they provide convenience. If you don’t have cash on hand, you can simply use your credit card to buy what you need, whether offline or online. 

👍 Zero-Interest Loans and Installments

Planning to buy that latest flat-screen TV or that edgy mountain bike but can’t pay for it in full cash? You may opt to pay a percentage of the price tag with your cash and cover the rest with your credit card. If you’re lucky, you may chance upon a zero-interest offer, which will make your monthly installments lighter.

👍 Build Your Credit Score

A credit card will help build your credit score. Your credit score is the figure that determines how creditworthy or responsible you are when it comes to handling and paying debts.

When you borrow money from lending institutions in the future, they’ll check your credit score first. If they see that you have a good credit score, they may offer you a loan package with a good interest rate.

Remember, though, that you’ll only receive a good credit score if you always settle your dues on time.

👍 Perks and Privileges

As mentioned, credit card companies offer customers different rewards, ranging from air miles to loyalty points to cashback. The more you spend with your credit card, the more rewards you’ll get.

👍 Secure Spending

Credit cards these days are more secure than ever. With modern security features, you can buy online or offline without worries. You can even lock your card via your bank's app in case it’s missing or lost. That way, the thief won’t be able to use your card. 

👍 Handy for Overseas Spending

You can use your credit card wherever you are in the world. This makes shopping abroad truly a breeze. 

However, keep in mind that you need to seek permission from the bank before you can use the card in another country. Also, you’ll need to cover the foreign currency transaction fees. 

👍 Useful for Emergencies

Even if you have an emergency fund or extra cash stowed away in a piggy bank, it may not be enough during an unexpected event. In case you’re not liquid at the moment, you can use your credit card to deal with certain emergencies. You may even take advantage of its cash advance feature. 

What are the Disadvantages of Owning a Credit Card?

While you might have heard stories of people freezing their cards in ice or cutting them into pieces so that they won’t be able to use them, it’s important to understand that credit cards don’t cause trouble per se. The majority of the drawbacks stem from the cardholder’s attitude and lack of discipline.

👎 Unnecessary Debt

Credit cards are easy to use. If you don’t practice self-discipline, you’ll find yourself overspending and eventually drowning in debt.

👎 Damage Your Credit History

If you’re building your credit score to apply for a loan in the future, unpaid credit card debts will get in the way. This is because unsettled credit card obligations negatively affect credit scores. As such, always prioritize settling your credit card balance to keep your score in the green.

👎 Lots of Fees

As mentioned, you’re not only paying interest charges. You’ll also have to cover other fees, ranging from annual fees to cash advance charges. Additionally, the longer your installment term, the more interest you’ll need to pay.

👎 Ballooning Interest Due to Minimum Payments 

One of the most important facts about credit cards you need to know is that paying the minimum due amount isn’t practical. As a newbie, you may think that the minimum due is your total bill, leading you to believe that your credit card bill is low. 

But that’s not the case. The minimum due amount is only a portion of the outstanding bill you need to pay to keep your credit account in good standing. Even if you settle it, the rest of your bill will still be charged with interest, which aggregates in the following months. 

👎 The Need to Check Every Month  

Your credit card bill requires thorough scrutiny. You need to make sure all your transactions and purchases are correctly reflected in this document. After all, scammers employ sophisticated credit card fraud methods these days. 

Final Thoughts

Credit cards are a must-have, especially now that businesses have embraced cashless and contactless payments. This tiny plastic card definitely makes life more convenient.  

Of course, there’s more to credit cards than what’s discussed in this credit card 101 guide. Along the way, you’ll need to know advanced concepts, such as debt consolidation, balance transfers, and cost-cutting techniques. But for now, this in-depth credit card primer should give you all the essentials.

If you wish to know more about credit cards, feel free to explore our other articles. And if you’re ready to get one, you can use our comparison tool and apply for a credit card through Moneymax.

Sources:

• ^[1] The History of Credit Cards (Bankrate, 2022)
• ^[2] Understanding Credit Card Interest (Investopedia, 2023)
• ^[3] BSP Credit Card Fees (Bangko Sentral ng Pilipinas)