How Credit Cards Work

The credit card has become one of the most important things in people’s lives today. In America, a survey revealed that most people have at least one credit card with them. Actually many people have two or three cards. It is very interesting how credit cards are becoming part of people’s lives. Queuing at a cash ATM machine, it is not unusual to see someone swiping up to ten cards, one by one. But the question is, do people actually understand the concept behind credit cards, and how they work? Or do we just use the cards because everyone else is using them? Your Personal Financial Mentor gives some of the important concepts used by credit card providers.

The first thing you should remember is that credit cards charge interest. Whenever you use a credit card for your shopping, you are borrowing the money from the financial institution that has provided the credit card. This money will be paid back with interest. Therefore the more you spend, the higher the interest that you will be charged. Moreover, if you take long to pay your credit card debts, you will also be charged more in terms of interest. That is why it is important not only to control your spending habits, but also to pay all your credit card debts on time.

Some providers usually give a period within which you can pay the debt without interest. This period is usually referred to as Grace period and you should always try to take advantage of it.

One mistake people make when using credit cards is withdrawing cash from an ATM. Usually, this is called a cash advance. You should not confuse a credit card with an ATM card. The money you withdraw is not from your bank account. Rather, you are borrowing. The problem is that with a cash advance, interest rates are extra high and you will not be given a grace period at all.

Credit cards also have a way of keeping a history of your spending and payment habits for the longest time. Late payments usually indicate on your history and a series of late payments can hurt your credit score very badly.

Lastly, the concept of balance transfers is a very tricky one. People get tempted to take a new card with lower rates and then transfer the balances from their previous card. But you should play caution because the lower interest card might give you a very short period within which to pay.

Categories: Credit Cards

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July 11, 2013 How Credit Cards Work