How do credit cards work?

Select’s editorial team works independently to review financial products and write articles that we believe will be useful to our readers. We can receive a commission when you click on links for products from our affiliate partners.

If you’ve never owned a credit card, you may be wondering how it works and what your responsibilities as the cardholder are.

Credit cards are essential if you are looking to build credit, and they’re also a convenient way to pay for everyday purchases, earn rewards, and more. However, dealing responsibly with them is essential in order to avoid interest charges, default interest and the risk of indebtedness. However, by understanding how credit cards work, you can avoid the potential negative effects and reap the benefits of using a credit card.

Under, CNBC selection explains how credit cards work so that you can get the most out of your credit card.

How do credit cards work?

How to use a credit card

A credit card can be used to pay for new purchases by swiping, tapping, or inserting your card into a payment terminal or entering your account information online. You may also be able to use a mobile wallet like Apple Pay or Samsung Pay.

Once you’ve made a purchase, it will show up on your account balance as “pending”. Posting purchases usually takes a few days. At this point, the purchase amount will be added to your total balance.

Every month you will receive an invoice with all purchases made in the last 27 to 30 days (depending on the length of your billing period). Your bill is due on the same date each month. They usually have a Payment term, ie at least 21 days after the end of a billing cycle in which you can settle your balance free of interest. Interest will be charged for payments after the grace period has expired.

You have the option of the Minimum payment, often $ 25 or $ 35 or some other amount up to your total balance. We recommend always paying on time and in full to avoid interest and fees.

General credit card conditions

Make yourself familiar with these General credit card conditions before using a credit card.

  • Annual fee: The annual fee for holding a credit card. Some cards may not have an annual fee or may waive the annual fee for the first year.
  • Balance transfer with effective annual interest rate: This is the interest rate for Balance transfers and can be equal to or greater than the APR on the purchase.
  • Transfer fee for the remaining amount: When transferring debt from one credit card to another, there may be a 3% to 5% charge per transfer with a minimum of $ 5 or $ 10.
  • Cash advance effective APR: The interest rate that you get when you take out a Advance payment. This rate is often one of the highest APR that can be charged, and cash advances accrue interest immediately with no grace period.
  • Cash advance fee: When you take one out Advance payment, you will likely be charged a 5% or $ 10 fee, whichever is greater.
  • Foreign transaction fee: Purchases outside of the US may incur a per-transaction fee, typically 3%. (Visit the best credit cards with no foreign transaction fees if you want to avoid this fee.)
  • Late Pay Fee: Late payment of your credit card bill can incur a charge of up to $ 40. (Read more about What if you miss a credit card payment and if a credit card payment is considered late.)
  • Minimum payment: The smallest amount of money you have to pay each month to keep your account up to date is that Minimum payment.
  • Percentage Percentage Penalty: If you pay late, card issuers can penalize you with an interest rate higher than your regular APR.
  • Buy APR: the interest rate charged for new purchases.

Advantages of the credit card

Credit cards are more than just a convenient method of payment for purchases. Many card issuers offer additional perks such as bonuses and special financing that make credit cards one of the most advantageous payment options.

Below we list the advantages that your credit card offers. Check your cardholder agreement for the exact benefits your card offers.

  • Build up credit: Credit cards are a smart way to Build up credit or improve a less than excellent credit score. Unlike debit cards, which have your credit-worthiness, Credit cards report activity to the three major credit bureaus – Experian, Equifax, and TransUnion. So if you use your credit card responsibly, you can see a positive impact on your credit score. (Read more about how to do it Check your credit score for free.)
  • Reward: Many of the best credit cards offer Cashback, points or miles on all purchases so you can maximize your rewards simply by paying with a credit card. Visit the Best Reward Credit Cards and The best cash back credit cards.
  • Welcome bonuses: Some credit cards are competitive Welcome bonuses that can be worth more than $ 500 if you spend a certain amount of money within the first few months of opening the account.
  • Shopping discounts: Select issuers such as American Express, Chase and Bank of America bid exclusive purchase discounts in catering, retail and travel agencies. These offers usually give you either bonus points or a percentage or a set dollar amount of cashback that will be added to your account.
  • Annual billing credits: Card issuers can be annual statement of account in selected categories. For example the Chase Sapphire Reserve® offers $ 300 annual travel credit and some travel rewards cards offer Credit for the registration fee for Global Entry or TSA PreCheck.
  • Special funding: Many credit cards offer introductory APR periods that don’t charge interest for a period of time. During the introductory phase, you may not benefit from interest on new purchases, credit transfers, or both. These deals are a great way to save on interest costs as well get out of debt. (Check out some of the Best credit transfer credit cards and best toll free credit transfer cards.)
  • Additional advantages: Credit cards can come with additional protection such as extended warranty protection, return protection and travel insurance, as well as lounge access and additional hotel amenities that increase the benefit of paying with a card.

How to get a credit card

Note to editors: The opinions, analyzes, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.

Leave a Reply

Your email address will not be published.

Back To Top