Forgot your password?

How Credit Cards Work

By Edited Jun 28, 2015 0 0

Credit Cards(115011)

Credit cards allow you to easily purchase products or services online or in stores without actually having cash on hand. Owning a credit card requires you to have a sufficient credit profile to obtain credit, and it’s a great item to posses when you plan to go shopping.

The major credit card companies that you'll see are Mastercard and Visa. When you see people who own more than one credit card, it likely means that they have maintained a strong credit rating, thus allowing them to obtain credit cards from more than one banking institution.

How do credit cards work? There are three possible ways of owning a credit card:

  • First, you can personally apply for a credit card.
  • Second, you can be the supplementary card holder of another.
  • Third, you can have a consistent, good standing as bank depositor at a particular bank.

When you apply for a credit card, your source of income needs to be verified. If you are employed, your employment status and salary are verified through your tax withholding. If you own a business, the bank checks your source of income via the tax return you filed, along with any financial statements you may have provided. That’s how credit cards work during the verification stage.

If you’ve been trying to obtain a credit card but you can't seem to get approval despite the complete documents you have submitted, there may be inconsistencies with your credit profile and the documents you have submitted. Consistency is important when it comes to getting approved, because banks/credit card companies want to be sure that you aren't a risky borrower.

How credit cards work when you already own one or have been approved, varies depending on your spending habits. Your credit limit is your limit of the amount of purchases you can make before you're required to pay down some of the balance (aside from the minimum monthly payment the credit card company requires).

But before you abuse your credit limit, always think about how much you can afford to pay.  If you have a $10,000 credit limit but can only afford $5,000, it would be wise to not use up your entire limit, as you might find yourself struggling to pay down the balanced owed.

If you pay the outstanding amount on or before the deadline, you won't incur interest.  "Interest" is what the credit card companies charge you in exchange for you borrowing their money (no different than a regular loan). When you don't pay the entire balance, expect to pay an interest. To avoid penalties and damage to your credit report, be sure to pay at least the minimum amount due each month.

In the following month after carrying a balance, your total amount due would equal the principal (i.e. the amount you originally purchased) plus the applicable interest from the unpaid portion of your previous balance due. The risk in credit card spending is the revolving interest of your unpaid amount due because you have to pay for the interest on the interest of your previous unpaid balance due.  Eventually, the $500 television you put on your credit card could wind up costing you a lot more.



Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money