What is a Credit Card?

What is a Credit Card?

Introduced as a system of payment, a credit card allows its owner to purchase goods and services on credit.

How Does a Credit Card Work?

A credit card is different from a charge card – a charge card requires that you pay the balance off monthly or put the funds onto the card before you can use it, whereas a credit card allows the consumer to have a continuing balance of debt, but this debt is subject to interest.

The credit card owner agrees to pay the card issuer, once a purchase has been made. The cardholder gives consent either by signing a receipt or by entering a private PIN number.  This for of payment can also be used over the phone, through the mail, and over the Internet.

Each month the cardholder will receive a statement in the mail. The statement will outline purchases made over the past month, their amounts, the minimum payment amount due, and the due date. If the balance is not paid in full, the credit card issuer charges interest on the amount owed.

More about Interest Rates

Your credit card will have three different interest rates, make sure you know what these rates are and the difference between them.

Purchase Interest Rate: The rate charged on new purchases.
Cash Advance Interest Rate: The rate charged when you use your credit card at the ATM to take out money. This rate tends to be higher than the purchase interest rate.
Balance Transfer Interest Rate: The rate changed on an outstanding debt that you transfer onto the credit card. Your issuer may also charge a flat fee for each balance transfer.

Grace Period

If you make a purchase on your card on the 4h of the month, and pay it off in full as soon as you receive your credit cards statement on the 21st of the month, you won’t be charged interest.  Why? The Grace Period.

The Grace Period is the length of time when you will not be charged interest on your purchases. So essentially, you can borrow money at the beginning of the month and pay it back at the end of the month without incurring interest charges because you are within the Grace Period.

The minimum grace period for most credit cards is 21 days. HOWEVER, the grace period will be voided if you do not pay your balance in full before the due date. So if you can’t pay up on or before your due date, the interest will kick in and get backdated to the day you made your purchase.

The Grace Period DOES NOT apply to cash advances and balance transfers.

Potential Pitfalls

Knowing that you have a piece of plastic in your wallet that will easily allow you to purchase anything you want (within the boundaries of your credit limit), can be very tempting. The credit card companies hope you are tempted. They hope you make lots of purchases and sometimes forget to pay them off so they can make lots of money on the interest.

Budget your money and use your card wisely to avoid lining their pockets with your hard earned cash.

 

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