How do Credit Cards Work?


Credit cards are designed to build credit not wealth. That's right, credit card corporations want to get you to borrow money before you can actually pay it back at least in part. Once they've got you as a long-term customer, their plans change. They make more money that's why they're always looking to give you new credit and new incentives.

However, your financial future doesn't rest on your next card application. Debt repayment strategies have always been key to building wealth. If you don't know how do credit cards work?, consider this. You go to a restaurant. You want a meal, but you really don't want to spend much money. So what do you do?


You use your credit card! Now how do credit cards work? Well, once you've spent your "entire" credit line on that fine dining meal, you now owe the restaurant something. Usually this is in the form of a charge off. This is where you must be paying someone to take care of you.

That's just one scenario, though. There are several others. Say you go to a store to buy a small item that needs to be delivered. Instead of using cash, you bring your credit card. The cashier scans the bar code on your card and then it's in their system to figure out how much you owe.

How do credit cards work? Another way of thinking about it is this. If you have a personal loan at hand and the lender reports your balance as available credit to the credit card company, the total interest charged on that loan will be subtracted from your outstanding balance on your credit card. That loan amount now becomes available to you to use to pay for the item you took out.

How do credit cards work if you have an annual percentage rate? The APR is the interest you pay when you use your credit cards. The higher the APR, the higher the finance charge. If you have an APR that is lower than your credit card interest rate, your finance charge will probably be less than your credit card interest rate.

Why are they different? Banks charge different rates. They base that rate on their risk level. Credit card companies base their APR on how much money you are willing to pay them now, versus how much you might be willing to pay them later. It's kind of like the bank of America that has two different interest rates: one for home owners, and one for renters. You can only make payments once a month if you own your home, but if you rent, you make your payments every few weeks or even monthly.

To summarize, you will always pay interest, and you will always pay a finance fee. However, the APR and finance fee are both lower than your credit cards interest. The key to using your credit cards wisely is to pay off your balances as soon as possible, to avoid paying interest and fees.

How do credit cards work? In a nutshell, if you have a credit score, then you will have an easier time getting approved for a new credit card. There are many benefits to having a good credit score. For example, you don't have to pay a monthly payment. You only make your payment when you take out the card. As long as you make your monthly payments on time, this will not affect your credit score.

How do credit cards work if you have a low credit score? If you have a low FICO score, you will most likely be denied credit cards. This is because lenders see those with a low FICO score as high risk. They want a high percentage of credit card transactions to go through with no risk to their business. You will, therefore, pay higher fees and rates.

How do credit cards work if you have a bad credit history? Even though you won't be able to get approved for new cards, you can keep applying for cards from other companies. By keeping your FICO or debt ratio in check, you can possibly improve your credit history over time. Eventually, you can be approved for a lower interest rate.

How do credit cards work if you have a history of financial problems? If you have made late payments in the past, you may have a hard time being approved for new credit cards. Instead, apply for secured cards that require collateral to be put down. As long as you pay your monthly balance on time, you can easily increase your credit history as you prove you are able to make the monthly payment. Over time, this can eventually lead to better rates and fees.

Posted Using LeoFinance Beta