Similar to any other card in both shape and size, a credit card can come from a variety of different financial institutions. A credit card provides you with an established credit limit, which otherwise allows you to make purchases by borrowing money upon it.
When it comes to using a credit card, you have to be a responsible user, understand interest rates, respect your payment schedule and stay on top of your recurring balances. Take a look at the following information to learn everything you need to know about credit cards.
What is a Credit Card?
Credit card issuers provide users with a credit card that has a set credit limit, giving users purchasing power against a borrowed amount. The maximum borrowable amount is the limit set on your card.
Unlike a typical cash loan, a credit card allows you to borrow as much or as little of the set amount at any given time. As soon as you pay back what has been borrowed on your card, you can spend it again.
How do Credit Cards Function?
Credit cards have both similarities and differences with debit cards. When paying in person inside a store, you can typically swipe, insert, or tap your credit card, much like you would your debit. In certain cases, your postal code may be required. When paying online, you’ll be asked to fill out much more information including card number, expiration date, security code, your address and your name.
In both scenarios, when you use your credit card to make any kind of purchase, the payment terminal verifies whether your credit card is valid and if you have an available balance. Your credit card issuer will then approve or decline the transaction. There are two common reasons for refusal: having reached your credit limit or possible fraud activity and thus a deactivated card.
If you ever have to deal with a deactivated credit card, don’t panic! This doesn’t automatically mean your identity has been stolen. Your credit card issuer can deactivate use for several different reasons including suspicious purchases or long distance purchases if you’re travelling. Contact your card issuer as soon as you notice any problems.
What is a Line of Credit?
A line of credit is the limit of funds you can borrow off your credit card. The main difference between a traditional loan and a line of credit is the fact that once you pay back the money you’ve borrowed on your credit card, you can borrow it again and again! Every time you use your credit card to make a purchase, your remaining credit diminishes by that purchase amount.
Take a $500 credit card for example. If you make a $50 purchase, you’ll have $450 in remaining credit and you’ll owe the $50.00 to your issuer’s credit card. If you borrow another $50 prior to paying back the original $50, you’ll then have $400 in available credit and owe $100. If you pay back the $100 on or before your billing due date, then you’ll have access to the total $500 in available credit.
Spending and repaying your credit card limit can be done as many times as you like, as long as you are respecting your credit card repayment terms. The terms “revolving accounts” and “open-ended accounts” are often used when referring to credit cards as well.
How Does Interest Rate Work?
When you make purchases on your credit card, you also have what is known as a “grace period” when it comes to paying the purchases back without being charged interest rate on that balance. This period is usually anywhere between 21 and 28 days.
If the balance on your credit card isn’t paid off in full, you’ll be charged an interest rate – which is essentially a fee for using your card. The sum added to your credit card balance will depend directly on your current card debt as well as your interest rate percentage.
Depending on your financial situation, you can be approved for a lower or higher interest rate. The better your credit history and score, the better the interest rate you can expect. Interest rate is the percent rate you pay for borrowing money on your credit limit.
Should I Make Minimum Credit Card Payments?
At the very least, you have to make the minimum payment on your card in order to avoid late fees and not negatively affect your credit score. The minimum required payment must equally be paid on or before the due date. Paying the minimum balance every month is not only the slowest but the most expensive method of going about paying off your credit card balance.
If you are looking to avoid paying interest, you should attempt to pay your entire balance each month. Credit card issuers don’t require full balance payments because they make more money if you keep a renewable balance. Plan your monthly purchases and payments ahead of time and use your credit card wisely!
What is the Difference Between a Debit and a Credit Card?
Sure, the two rectangular cards may look identical, but they function in very different ways. While using your debit card is spending money you actually have from your bank’s checking account, using a credit card is like spending money you don’t actually have, or borrowing it on your credit limit. When using your debit card, you might be required to enter your PIN and with a credit card, you may be asked for your signature.
If you plan on being a responsible credit card user, you’ll probably have to do a little research in order to best understand how credit cards function. Don’t hesitate to discuss directly with your card issuer if you have any questions about repayment terms, reward programs or applicable fees and charges.