How Do Credit Cards Work?

Credit Card

Credit cards have replaced paper money while offering a range of benefits and rewards. Their convenience and ease of use are great, but it’s important to understand what a credit card is and how they work to get the most out of them. Here’s an overview of what it is and some of the things you should know or might have questions about.

What is a Credit Card?

A credit card is a revolving credit product with a set limit. Revolving in this context means you do not have to reapply for the credit limit once you’ve been approved. For example, if you’re approved for a credit card with a limit of $500. You can spend up to $500 on the credit card, and as long as you pay it off each time, you will have the $500 limit available again. The only time you would have to re-apply would be if you’re seeking a higher limit above $500.

Another way to view a credit card is to consider it a short-term loan that’s always available to you. Upon using the loan, you are required to pay back the balance within a certain number of days, and if you fail to do so, the entire balance is due along with interest payments set by the lender.

How Old Do You Have to Be To get a Credit Card?

To get a credit card, you have to be the age of majority in your respective place of residence This usually means you are of the age to sign for something legally. If you are the age of majority but not the age of majority to be able to sign a loan agreement, then you might need to seek a co-signer who can sign with you.

How Do You Get a Credit Card?

The most common way to get a credit card is from a major financial institution. The bank will complete a credit application to determine if you qualify for the credit card you are applying for. It’s important to note that not all credit cards have the same requirements. Some credit cards have a minimum income requirement, while others are geared towards a specific target segment, such as student credit cards.

Here are some tips to keep in mind.

  • Review the credit card you plan to apply for online and determine the minimum income/credit score. If you do not meet the income requirement, look at other cards and be skeptical of getting approved for a credit card for which you do not have the income requirement.
  • Never apply for a credit product or get a credit card when you have no source of income.
  • Don’t use your credit card to finance purchases you don’t plan to pay back before the interest-free grace period.

If you’re unable to get approved for a bank credit card, consider applying for a store credit card. They tend to have higher annual interest rates than bank credit, but they can be easier to obtain.

Are credit cards free?

That’s a loaded question. Here’s what you need to know. All credit cards carry an annual interest rate. The rate can vary, but most bank credit cards carry an annual interest rate of 19.99%. Retail credit cards can have much higher annual interest rates.  In addition to the annual interest rate, some credit cards also have an annual membership fee. The membership fees can vary from card to card.

What is the interest grace period for Credit Cards?

  • Most credit cards will provide an interest-free grace period. It’s typically around 21 days depending on your card. Purchases made within the 21 days grace period and paid back in full will not be charged any interest. If you cannot pay off the entire balance, you will be charged interest on the portion you cannot pay off.

What If I Can’t Pay Back my Entire Credit Card Purchase When I Get My Bill?

  • If you cannot pay off the entire balance, you should at least pay the minimum payment required to maintain a good credit rating. But a word of caution here. Pay as much as you can afford because paying the minimum payment will incur interest on the outstanding balance. This is how a $500 balance can turn into $1000 quickly. Credit cards utilize the compounding principle, so you get charged interest on interest. The best way to avoid this is simply don’t charge things onto your credit card that you do not have the money for.

Always remember that credit cards are short-term loans with a high annual interest rate. They are not free, and while they offer you convince, don’t get sucked into using them to finance your lifestyle. Establish good credit habits by paying off your credit card balance in full every month.

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