What is a credit card and how do the fees work?

What is a credit card and how do the fees work?

Most of us were introduced to credit cards long before we ever use them. But just fool someone else using a credit card. It seems like magic when someone steals their credit card with their purchase goes away without ever paying any cash. The technology that makes credit cards work is impressive, but cards are not magical – you still have to pay for what you buy that you pay for later.

 

What is a credit card?

What is a credit card?

A credit card is a plastic card that gives you access to the credit limit of your credit card issuer. A credit limit is like a loan. However, instead of giving you the full loan in cash, the bank lets you take out as much of the loan as you want at a time and you can reuse the loan over and over as long as you pay back what You borrowed.

 

How you credit cards work

credit cards work

Many are behind the scenes of a credit card transaction. When you swipe your credit card to make a purchase, the merchant’s credit card terminal asks your credit card issuer if the card is valid and if you have enough credit available. Your credit card issuer sends back a message that the transaction is approved or declined. If it is approved, you can take your goods and services and go along the way.

Every time you make a purchase, your available credit goes down by the same amount. If you have a $ 100 credit limit and you make a purchase of $ 25, you will have remaining $ 75 credit available. You will owe $ 25 to the bank. If you borrow another $ 50 before paying back $ 25 borrowed, you would owe the bank a total of $ 75 and have $ 25 in credit available.

What makes a credit card different from a normal loan is that your credit limit is available after you have paid the funds on the card. In the previous example, if you repaid the $ 75 you owed, you would get back $ 100 of the available credit.

You can spend the process repeating up to your credit limit and keep repaying the balance as many times as you provided through the term of the credit card. The terms would calculate your payments on time and not more than your credit limit.

You can continue borrowing against your credit limit over time, which is why credit cards are referred to as revolving accounts or open accounts.

 

The cost of a credit card balance from charging

credit card balance from charging

The credit card issuer gives you a certain amount of time to pay back the entire amount that you borrowed before your interest was charged. The time before interest is charged is called the time limit, which is between 20 and 25 days. If you fail to pay off your full balance sheet before the deadline, a fee or funding cost is added to your account balance. The financing cost is based on the interest rate and the outstanding costs.

The interest rate is the annual rate that you pay for borrowing money on your credit card. Interest rates are usually based on market interest rates, your credit history, and the type of credit card you own. If you have a good history of paying back your credit card bills, you will usually qualify for lower interest rates than what is typically charged.

You have to pay your balance in full before the end of the period if you avoid paying interest. However, the credit card company usually does not need you to pay back all of what you owe at once, but you must at least pay the minimum payment on the due date to avoid a late penalty. Paying the minimum is the slowest and most expensive way to pay off your credit card balance.

However, it is important to always pay at least the minimum amount of time to get a good credit history each month and avoid late fees. As you build a stable credit history, you can qualify for a lower interest rate on the card.

 

Check your credit card activity

credit card activity

Every month the credit card company will send you a statement that includes your minimum payment, the due date and a list of transactions that have been written to your account since the last statement. It is a good idea to review these transactions to ensure that all transactions have been made by you and that there are no deviations. You also want to make sure that your last payment on your account was applied correctly. If any fees have been added to your balance, make sure they are legitimate.

 

Other types of plastic

credit cards

Physically, a plastic credit card is a piece measuring 3-1 / 8 inches by 2-1 / 8 inches. Typically, there are 16 places embossed on the front (15 places for an American Express card). Note that there are other types of cards that fit this description that are not credit cards but a credit card that you can imitate Swipe to make a purchase. For example, a check card or EC card is also printed with 16 digits on the front. However, purchases on a debit card are taken from your checking account. A prepaid card also looks and functions similarly to a credit card, but purchases are deducted from the prepaid account balance. The same is true for gift cards.

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