How do Credit Cards work?

Credit cards go beyond the whipping and swiping mechanics we have all come to know. Yes, believe it or not, there is a lot more to it than just that. Let look at a brief scenario; Uncle Joe John just came back into the family after, well, since you were not born.

No one knew where he has been, but are all happy to see him. Everyone exclaims how different he looks, like he has had plastic surgery. Let’s just hope Uncle Joe John is not a wanted fugitive. Would that not be something! You are just getting you life together after years and years of struggle. Next thing Uncle Joe John is being taken into custody for some 1970 bank heist in which he stole all the money of your hardworking community. You have been seen all over town with him. Hell, it’s your house that the police caught him at. Small town, everyone saw it on the news. If they did not catch the five o’clock news they caught the six or seven or heard it from the town’s gossip at 8, 9 or 10 that night oh yeah and at 6, 7, 8, 9 the next morning. But you can bet they heard it the same day. Now all your efforts to get back on your feet are gone. The community shuns you now and that dream job you knew you had, just sent you a breakup letter. Wow, that would definitely be something. Let’s just hope Uncle Joe John is who he says he is.

Okay so I digress, here is the scenario - You just borrowed money from Uncle Joe. He is the only one willing to lend you money as he is not aware of your past borrowing but not pay policies. You ask to borrow money from him, you state the amount and maybe why you want that amount. He agrees to give you the money, the two of you agree upon a set time you will pay the money back. You casually state you will pay the money back with interest and to your surprise, Uncle Joe says that sounds good. This is the same way credit cards work with a few tweaks in the scenario. To obtain a credit card, you fill out an application form. Using your credit history (credit score), the credit card company determines the maximum amount they would allow you borrow on the card. This is your credit limit. If you are in good standing after a period of use of the credit card (i.e. paying you bills on time and in full each month), your limit can be increased or you can request that it be increased. Your credit history not only determines your credit limit but also your interest rates and even terms.

So you have applied and have been offered a credit card. You get your card in the mail and take notice of the nice calligraphy on the card – your name, the numbers and those nice pictures. You are ready to go shopping. You walk into a store, look around and see something you like; you walk up to the counter swipe your card, sign and leave with your goods. You just got yourself the trendiest shoes. You will look great tomorrow in those shoes. Well, there is something else you got yourself also. Remember you just performed the whip-swipe action, taking out a loan to pay for your items, and you signed a receipt, obliging to follow the terms stipulated for your credit card and paying the amount in full. For some of us who may not be able to decipher the clues, you just got yourself a loan. In simpler terms, you owe and this time is not Uncle Joe but your credit card company.

You have used the credit card, what do you do? The ideal would be to pay the amount in full before your grace period is up. Your grace period is the time that you have to pay the full balance before you are charged interest. It ranges from 20 to 30 days depending on the credit card. Make sure to check your grace period, some credit card companies may be sneaky and not offer you one. If you can not pay the amount in full, you will receive a statement detailing your transactions for that billing period, your sum total and your balance. You bill or statement will also have a minimum payment to pay and the due date.

Okay sounds simple right? You got it, right? Well, keep reading before you decide you have a grip on your credit card.