How Do Credit Cards Work?

Credit Card

The same as your parents always have told you, one of the fundamental principles of Adult 101 is creating good credit. They probably recommended that you apply for a credit card the moment you turned 18.

Why? For What? Mom and dad recognized that having a better credit history would make managing the financial life much simpler. It might mean that when the time is right, you can easily buy a car, buy a home, or even starting your first business. Many such people who use credit cards definitely abuse them. Yes, it has been shown that merchants that accept credit card payments prefer to make cashless payments

After you get one, having a clear understanding of how the credit cards work will help you use them for your benefit. You’ll read in this article:

  • What are credit cards and how they work?
  • The credit cards are used to enhance the credit.
  • All about fees and payments.

What is the credit card?

The word “credit” came from the Latin verb meaning “believe” or “trust” in English. As such, your credit card represents a trust contract between you and its issuer. You are loaned money on a revolving basis to buy stuff because the issuer trusts you to pay it back.

The agreement that comes with your card is essential as it explains the rules that will allow you to pay your bill. The lender will consider you as trustworthy, or “creditworthy,” if you always pay your bills on time. You can be relied on to refund the money back. Instead, if you don’t pay your bills on time, issuers can start seeing you as a credit risk. Emitters of credit cards make use of the credit report Determine whether extending a credit line to you is a large risk or not. There is a credit score on the report the changes depending on the circumstances and behaviors.

How to Get a Credit Card?

There are many ways you can convince banks/financial institutions to give a card to you:

1-Have a job: having work. Part-time or full-time jobs can convince major credit card companies that the money you spend on their account will be returned.

2Try your bank: If you have in the past kept a checking account or savings account with a bank in good standing (i.e., not overdrawn), then you will have a fair chance to get a credit card from that bank.

3Try a shop in retail:  Try a shop in Retail. Stores issuing their own credit cards are also relaxed by extending credit to individuals with little credit history.

Types of Credits Cards         

You won’t have trouble finding a credit card which suits you well. Here are only a few:

  • A Secured Card: When you’re only starting to develop your credit, you should ask your bank for a deposit-secured card. You have taken the first steps in building a strong credit history if you make your payments on time.
  • A Student Credit Card:  Most card issuers offer college students starter cards. Be aware that the interest rates are often high for these.
  • A Traditional Card:  In your eventual credit card arsenal you will plan to include at least one of the big three: VISA, MasterCard, and American Express. They are approved all over the world and many of them offer bonus packages as well.
  • A Retail Card: If you shop regularly at one location, it may be your duty to get a credit card for that store. Some stores offer discounts only for their users of loyal cards, typically about 5%. Be sure to always pay the bill on time, as these types of cards are also associated with higher interest rates.
  • Travel rewards. This type of card offers miles or points per dollar spent on all purchases or in specific categories, which can then be redeemed to offset future travel costs. Travel cards often have perks that include complimentary access to airport lounges or free hotel stays.

How do Credit Card payments work?

Your credit card issuer will send you a bill once a month, either electronically or by mail, detailing what you ‘ve spent on your card. If you pay your whole bill in full every month, there will be no fee to pay. The credit card company can also make money by charging credit card transaction fees to the retailers you’ve shopped at.

You won’t have to pay your bill in full every month but you can expect a high credit score if you do. If you have to carry a balance, the bill will indicate what minimum amount you need to pay and not pay it will have an adverse effect on your score.

What is the minimum payment?

A minimum payment is set by your card issuer and can vary from month to month. This is the lowest monthly fee you must pay to stay in their good graces. It will only represent a small percentage of the total you owe, usually around 2% if you have a large balance. If you owe less than $1,000 or so, your minimum payment will probably be a flat $25.00. If you owe less than $25 on your credit card, your whole balance will be due.

The problem with paying only the minimum is that it won’t be enough in what you owe to make a true dent. You should pay more than the minimum if you want to avoid racking up long term debt.

Should we keep Credit Card Balance?

If you’ve learned that carrying an occasional balance is a way to create good credibility, just now put the theory aside. The easiest and quickest way to make use of your credit is to pay off your bills in full each month.

What are Credit Card Fees?

Everything you do other than transacting with your card and only paying it in full will incur credit card fees. Some of the most common royalties are:

Interest: When you are carrying debt, you will be paying a rate of interest that was agreed upon when you signed up for the card. Interest rates differ from card to card and from person to person and are expressed on your bill as an annual percentage rate (APR). APR is simply the percentage of interest that you will be charged on what you owe each year. If divided by 365, the APR of your card gives a daily rate that the issuer will pay.

Balance Transfer Fees:  These are special offers where you can transfer your balance from one card to another. They can be beneficial if you have debt on one card at a high rate, and then get another card at a lower interest rate. Transfer fees for balance are usually 3-5% of your balance plus a small transaction fee.

Credit Card Advance Fees:  Cash Advance fees for credit cards. Many credit cards can be used to get money out of ATMs. But, unlike debit cards, there are fees associated with this convenience and they may be very high.

Late Payment Fees: If you miss paying the payment on time, you will be liable for a penalty set out in fine printing. These fees range from $25 to $35.

Foreign Transaction Fees: When you use your credit card in a foreign country, you pay a premium to convert your local currency into U.S. dollars. This charge is imposed by your bank to cover interchange fees with foreign banks.

Annual Fees: Some credit cards have an annual use fee, ranging from $25 to $100, depending on the perks associated with the card. There are many cards, however, that do not have any annual fees at all.

Understanding Your Credit Card Limit

Your credit limit is the maximum amount that you can charge on your card. Once that limit has been reached, you have “maxed out” the card. Generally speaking, it is best to keep your balance below 30% of your limit.

 How to choose the right Credit Card for You? 

The key to a wise choice when it comes to credit cards is to understand all the costs involved. If you were to have a balance, what would be your APR? Does your card have an annual fee?

Also, consider the cornucopia of credit card rewards out there and think about what benefits would best benefit you. Is that the miles to travel? Discounts for gas stations? Or just cashback?

Conclusion… You Need a Credit Card

The benefits of having credit cards far outweigh the dangers of overspending on most people. Credit cards are your first foray into the world of lending, and along the way, you’ll be glad you’ve made good credit.

See Also
How much money is there in the world?

How to get credit card without a job?