Credit cards are small pieces of metal or plastic that are issued out to individuals by financial institutions, which allow those individuals to make purchases by borrowing money upfront. That upfront money has a pre-established limit.
Credit cards are made to allow people to access credit limits provided by the card issuer. A credit limit is a maximum amount the individual owner can borrow. Rather than giving you a complete cash loan, a card issuer allows you to take money off your given credit limit at any time you want. Of course, you must pay off what you borrow before you can borrow once more.
How Do They Work?
We could write an entire book on credit cards and how they work, but instead, we’ll give you a short rundown as to what you should know about credit cards and how they work.
Let’s say you make a purchase with a credit card at a brick-and-mortar store. While no money is withdrawn from your bank account at that instance, you must eventually pay back any funds with the applicable fees or interest that your issuer has put on the card.
Users can choose to pay the full amount back right away, meaning there will be no interest to pay, or they can choose to pay off the debt over a much longer period, meaning there will be interest to knock off at that point.
All credit cards come with a single account number, expiration date, and security code.
We like to think of credit cards as “unsecured revolving debt.” Most credit cards are unsecured debt, as the borrower is borrowing money without any collateral. Essentially, a credit card issuer is taking a major risk by giving you a credit card, as they don’t have anything to take from you in the case that you do not pay your debt back. This is much different than secured debt, such as a car loan or mortgage.
It is also worth noting that credit cards are very unique, as they are the only form of credit where the user has the option of paying interest. Typically, cards have a grace period of 21 days before interest accrues. The only way a user will have to pay interest is if they do not pay back their full balance statement by the given due date.
It is important to understand that this grace period is only applicable to new purchases that have been made. This does not include cash advances or balance transfers, as these two things start to accrue interest right away.
Becoming a Smart Credit Card Owner
One of the best things you can do with a credit card is to pay it off on time. In doing so, you’ll keep creditors happy and your credit score high. Of course, there is always the option of purchasing tradelines to get your credit where you want it to be as well. Make sure to get in contact with us here at Personal Tradelines to learn more.