How Do Credit Cards Work


Today’s generation lives on plastic – the credit cards. Credit cards are offered by different banks that can help you to make purchase and make cash advances. They relieve you from carrying cash while going for shopping. Almost every merchant allows customer to make purchase using credit card.  In the last few years, credit cards have seen a phenomenal growth. Credit card offers convenience to consumers but also attract huge interest rates if payment is not done within the given time frame.

Studies have shown that in the United States of America, an average American has at least one credit card; others have two or three while a few have as much as ten credit cards. Some people think that having many credit card is a symbol of status, which of course is not true at all.

There are so many users of credit cards but not all can answer the questions “How do credit cards work?

Credit Card Convenience

In most cases, credit cards work like cash. Credit cards pull money electronically from bank and are used to pay for transactions to the vendor. You can use it to buy anything you want and to pay for service that you avail. These cards are safer to use than cash because when they are stolen, they cannot be used easily. The owner can report about the loss and all transactions using the card number will be frozen by the bank that issued it. When you travel, you can get rid of the danger of losing money by just bringing along with you your credit card.

Credit Card Billing

People who are used to using their credit card use them even when traveling abroad. They can use it to buy tickets, pay hotels and restaurants or when shopping. They can even get cash from the card if they need to deal in cash in some of their destinations. Even without money, they feel secure moving around for as long as they have their credits cards because they know, they can have cash anytime for as long as they have those plastics.

Once you have made purchases, the bill is reflected in the bank that issued the card. The institution will then send you a bill with the amount that you need to pay for a given period. After that, you need to settle your account; if not, interest and penalties will be added and before you know it, the amount that you need to pay has already doubled or tripled.

Finance charge & Fees

Banks charge whooping interest rates as high as 18 to 23 %  if you are unable to pay the amount by the end of due date. It includes financial transaction fees, cash advance and balance transfer fees. Its therefore recommended to pay the entire bill when it gets due. If not, then you may end up in paying twice the amount what you were supposed to pay initially.

Types Of Credit Cards

There are several cards that you can use anywhere in the world. The first is the universal credit card. People who hold the card are charged by the bank some fees and they are billed monthly for their purchases. Others use the American Express card, which is also recognized and accepted anywhere in the world. These cards have replaced the use of cash and some people consider their cards more useful than cash amounts.

When you use a credit card, you can pay for things without using money. The items that you purchased are billed to your card and you need not pay for them right away. Most banks and financial institutions that issue credit cards give at least one month allowance before sending the bill. However, if payment is not prompt, the card owner will have to pay interest which could amount to almost 23%. This is one reason why people who have credit cards fall into debts that they can hardly pay.

Credit Limit & Credit Score

Banks assign credit limit to each customer who is offered the credit card. This credit limit is assigned on the basis of their employment, job security, previous credit score and some other factors. Banks normally start with small credit limit which gets increased of you pay your bills on time without any delay. If you are earning $60000 a year and your credit limit of your credit card is $3000 per month and you delay paying your bill every month, then it is highly possible that the bank may cut your credit limit to $1500. Bank may increase your credit limit if you constantly pay your pending bills on time without attracting penalty.

If you want to increase your credit limit, you can approach your bank, fill up the required application form and give details of your present income. Bank will check your papers, look at your previous credit score, some other factors and determine your new credit limit.

Each consumer who holds the credit card is assigned a credit score which is used by all the banks to decide whether the person should be given the credit card or not. These credit ratings tend to increase as long as you have good relations with your bank. Once your relations with bank turns bad, they will reduce your credit score. This credit score is even used to get loans from major financial institutions.

Rewards on Credit Card

Most financial institutions have point based system which allows you to earn points for every purchase you make. These points can be accumulated and can be used for shopping purpose. Not all the cards support this reward system. Its better to check out with your bank and see what kind of rewards do they offer and on which type of cards. This allows you to earn more out of your credit card.

One way of making your credit card work properly is by using it to purchase basic needs only. Before shopping, you must have a list of what you want to buy. Buying things that are not in your list could lead you to big amounts of credit card bills that you might not be able to pay later and which will lead you to a miserable life.