How does a credit card work?

Question

my husband and I both have never owned a credit card. I was preaproveed for a card and was thinking about activating it but i have no idea how it works. Do i just spend money and then pay off the card in monthly payments and how does intrest work. Basically, i need someone to explaine to me how to use, and payoff and manage a credit card, like your explaining it to a kid..because im cluesless about it. Thanks!

Answer 1

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Answer 2

A credit card is one of the most common types of loans.

A lending firm extends you a line of credit that you can access using a plastic card, usually 3-1/8 inches by 2-1/8 inches in size.

That card is your credit card. It comes with a number on the front and a magnetic band on the back. Merchants can charge debts to your account either by passing the numeric strip through a card reader or by manually typing in the number on the front. You can also charge debts over the Internet or by phone by giving the number on the front of the card along with the expiration date.

Credit card companies make money by distributing credit cards. First, they charge the merchant that processes your card. That merchant pays for the privilege of being able to access your money through a third party. The credit card company may also charge you in a variety of ways:

Annual fees
Interest on your debt
Late fees
Cash advance fees

You will generally receive a monthly bill that allows you to pay of the balance or pay them any amount equaling at leas their minimum finance charge. The minimum finance charge generally covers slightly more than whatever the interest on the debt for that month would be. If you pay only the minimum amount, it will take many years to pay off your debt.

When using a credit card it should be done wisely and only if you really need to use it. Some advantages and disadvantages of using a credit card are as follows:

Advantages:

You can purchase items on the spot and pay later
You do not have to use cash
No need to write a check
Disadvantages:

You pay a high cost to borrow money which is your finance charges and interest rates
You debt load is increased and so is your debt to income ratio
You decrease the amount that you should be saving in the bank cause you are paying interest and financial charges.
Have less money each month for household expenses
You can easily overspend and create real bad financial difficulties.
Credit cards can be very costly if you do not watch what you spend. A rule that you should follow is if you don't need it don't use it. If you buy items using you credit cards you will have to pay the lend era finance charge for the use of their money. The finance charge is the total amount you will pay which includes interest rate

Answer 3

If someone gives you a credit card like a Visa or MasterCard, you can use it to pay for just about anything. When you pay, you hand them your card, they run it through the machine, and as long as you have credit available on the card, they let you charge the purchase. Every month, you get a bill that shows you all the purchases you made with the card. It'll also tell you your balance, your available credit, and the minimum payment. As long as you make the minimum payment every month, you'll be OK. However, that's not the best way to handle it because you can get in trouble very easily if you do it that way. See, most credit cards have an interest rate of 14% or more (most cards are close to 20%). That means if you don't pay off everything you bought on the card over the course of a month, they charge interest on the amount you didn't pay. As a result, if you buy a $2,000.00 plasma HDTV and make the minimum payments, you'll probably pay over $4,000.00 for it by the time you're done paying it off. The best way to handle credit cards and to boost your credit rating is to buy something small on the card every month (like a tank of gas) and pay the bill in full every month. It's also better to use credit cards like that because you may find yourself in a pinch where you need money for an emergency, like car repairs or a plane ticket to attend a funeral in another state or something like that. If you have the credit available on the card, you can use the card for those expenses -- just remember to pay the bill off as soon as you can.

Answer 4

I use a credit card so I don't have to write checks and don't give anyone access to my checking account (debit card). I write one check to the credit card company for the entire amount each month. If you have the money and want to establish some credit history, this is one way to do it. Charge purchases to your card and make the payment when the bill comes. If you pay the minimum, then they (the credit card company) will tack on some interest charges on the amount of you daily average outstanding balance, meaning you are paying more for something than what it actually costs. If you income does not afford you the ability to pay it off each month, limit your spending on the card so that you are paying off more than you are incurring in charges. Don't let it get away from you are you can end up in serious debt.

Answer 5

You definently need a credit card to establish credit, otherwise purchasing homes and cars will be difficult and you will be stuck with higher interest rates.

Basically, the credit card has a limit of what you can charge on it. It is highly recommended that you pay the balance off every month or you end up paying interest. Most credit card companies have grace periods for repayment. That means when you make a purchase you don't have to pay interest if you pay the balance off in full and there was a zero balance when you made the purchase.

You can choose to pay your balance off over time if you make a large purchase like a TV. However, you will have finance charge every month that gets added on to your balance. The interest rate is that is listed is on a yearly basis. Divide it by 365 and you get your daily interest rate.

I hope that helps.

Answer 6

Read the back of your pre-approved credit brochure.