TheMoneyFeed is a reader-supported website. This post may contain affiliate links, advertisements or paid placements from our advertising partners, but the opinions are the author's own. Read our full disclosure to learn more.
The Role of Credit Cards in Transactional Banking and Economy
What is the role of credit cards in the current economy and also in transactional banking? Let’s find out:
Transactional banking encompasses that entire area where people spend their money on goods and services.
This can happen for large purchases or small purchases, but generally speaking, it is considered “everyday spending.”
This may include buying groceries, putting gasoline in your vehicle, paying for lunch, filling prescription drugs, and so on; ultimately everything you will spend money on a daily basis.
So while this concept of transactional banking is boring and somewhat mundane (especially compared to investing and debt, which involves excitement and stress and big-picture implications), the area of transactional banking is actually the most “active” part of one’s personal finance life!
This could be why we take this area for granted.
Today, consumers have a variety of options available to them when it comes to transactional banking.
They can pay for goods and services using cash, credit cards, and, more recently, debit cards.
In this post, we focus on credit cards and the role they play in your transactional banking life.
Contrary to what a lot of people with debt trouble might believe, credit cards can be used wisely in order to generate appropriate rewards without paying the high rates that these products normally charge.
Wow, what a mouthful. Let’s take a closer look what the important components to credit cards and their role in transactional banking.
Most people realize that credit cards come with an interest-free period. The trick is to repay what you “charge” to your credit card before interest is charged to the card.
For most, there is a “grace period” of roughly 18 to 30 days; pay off your charges before the time elapses and you have essentially delayed making payment for the goods you purchase.
But exceed that interest-free period by a single day and you have now borrowed for the purchase you made (there is a difference between delaying payment and borrowing).
With credit cards, borrowing happens at exaggerated rates; credit card companies now that many people either forget to make their payment or overspend, so giving a small percentage of people the benefit of an interest-free purchase is a small cost of doing business.
The key with credit cards is to pay them off before the grace period expires.
Credit Card Rewards
Realistically, there is no point in delaying your purchase if you are not going to be rewarded for it.
Using a credit card to gain rewards, whether they are Air Miles, cashback (generating a return from the credit card company based on a percentage of the purchased charged to the card), discounts, or other “points” or rewards makes sense.
In the case of cashback, if you use a credit card that pays you 2% of every purchase you make and you wisely repay your card before the grace period expires, you are not only delaying paying for your purchased goods, but you are giving yourself a discount of 2%.
You can also get cheaper gas and save some extra dollars on fuel every month by using credit card rewards smartly.
As with most reward-based cards, there is often a fee for the account, so you need to calculate your “break-even” point and whether the reward is worth the fee in the first place.
Another thing you need to decide is whether the rewards are appropriate for your needs. No point in paying for an Air Miles card if you are too afraid to ever get on an airplane to use them.
High Rates – Note to Borrowers Who Carry Balances on Their Credit Cards
Despite some attractive introductory offers and other incentives, credit cards charge high “regular” rates and are in fact an all-time high.
While it is definitely possible to float balances across various low-rate offers from one company to the next, the reality is that staying abreast of these logistics is not only complicated but extremely difficult.
Borrowers who carry balances on their credit cards will admit that the end of one low-rate promotion does not always align with the start of another offer. So the rates paid between offers can get steep.
The best way to get out of this downward spiral is to consider an unsecured consolidation loan, even though the rate will definitely be higher than the low-rate introductory offers on the cards you are paying off.
This is because the loan will eventually get paid off and the steady rate allows for better budgeting and less stress.
How To Use A Credit Card
The key to using a credit card is to repay the balance prior to the interest-free period expiring.
Failing to repay the debt can be a sign that you have a debt problem, and recognizing this sooner than later allows you to ask those tough questions, starting with What Kind of a Debtor Are You? and formulate a plan to repay the debt before it spirals out of control.
The reality is that credit cards are what cause people debt trouble in the first place, so it is important to be careful with how you manage these accounts.
Another key point worth noting is maintaining a manageable number of credit cards (one will typically do because if it has rewards associated with it, the more you spend, the more you earn).
Still, it is worth noting that using credit cards as an alternative to traditional forms of transactional banking (cash, debit cards, checks) can not only save time but can allow you to earn appropriate rewards.