How Do Credit Cards Really Work?

Using credit cards when paying bills or making purchases can provide convenience as well as an opportunity to save money, especially if you receive cashback. In addition, a credit account can help you build a positive credit history if you practice good financial habits.

Credit Cards

However, to get the most out of it, you need to understand how the credit card works. This article will explore all the essential facts you need to know about credit cards.

What is a Credit Card?

A credit card is a physical plastic card, often issued by a financial services company or bank, that allows you to pay bills, make purchases, or withdraw cash, depending on the type of card. In other words, you can think of a credit account or credit card as a form of short-term loan.

Your credit card provider sets a credit limit for you when creating an account. That means your available balance decreases as you charge things to the card. At the end of the credit card billing cycle, your insurer will require you to repay the amount you spent from your credit limit.

Which Credit Card Is the Best?

Most people assume all credit cards are similar and work the same way. However, this is not the case. Some credit cards are best for traveling, others for making purchases, giving rewards, and more. 

To help you ensure you have the right cards for the proper purposes, you must compare different credit card providers in your region. If you are not sure how to go about it, iSelect is an excellent comparison resource that can help you see what various credit card providers near you have to offer. 

How Credit Cards Work

When you use a credit card to make payments, the merchant’s bank receives your card information. The bank then obtains authorization to conduct the transaction from the credit card network. The card issuer must verify your details before approving or rejecting the transaction.

If the transaction is accepted, the merchant makes the payment, and the transaction amount is deducted from your card’s available credit. Your card issuer will give you a statement at the end of each billing cycle that includes all transactions for that month, your prior and new balances, the minimum payment needed, and the due date.

Charges and Fees

You need to be extra cautious when using credit cards as you may incur different types of charges. Some of these fees may include:

Interest Rates

You will be charged interest on your debt if you don’t pay it off in full at the end of the billing month. However, that may not apply if you are in the 0% introductory period, which often lasts anywhere from several months to nearly two years.

You may get an introductory rate as a new client when you initially obtain the card. Nevertheless, be sure to double-check if this applies to purchases, balance transfers, or both. 

Keep in mind that it does not cover cash withdrawals. Also, find out what the interest rate will be once the promotional period ends and, if possible, repay in full before then.

Fees for Transferring to Another Card

When transferring a balance to another card, you will mostly be charged a fee, usually around 2-4 percent of the transferred amount. 

Therefore, be sure to evaluate if it is worthwhile to pay this to benefit from a reduced interest rate on the card you are transferring to. 

Late Payments Fee

You will be charged a late payment fee if you pay your bill after the monthly deadline on your statement. 

Additionally, other organizations can see your history of late payments on your credit report. This may negatively influence future credit applications, including car loans or mortgages. 

Most people assume all credit cards are similar and work the same way. However, this is not the case. Some credit cards are best for traveling, others for making purchases, giving rewards, and more.

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