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Credit cards provide a convenient way to shop, manage bills, earn rewards and build your credit score. They can be a useful addition to your financial toolkit – used responsibly.
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Although credit cards look no different than debit cards, they serve different purposes. So how exactly do credit cards work? Read on to learn how to use credit cards and why it’s smart to have at least one in your wallet.
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A credit card is a financial instrument that allows you to borrow money from a bank or credit card issuer to make purchases in stores and online. Pay back the amount borrowed plus any interest or fees charged.
A credit card is a type of revolving credit that allows you to borrow money up to a certain limit, called a credit limit. Unlike debit card purchases, which are paid for with funds in your bank account, credit card purchases are made with funds borrowed from the credit card company. Therefore, using a credit card means borrowing money and paying it back. When you make a purchase, your available credit decreases.
When you make a purchase with a credit card, these steps are completed in seconds. Once the purchase is completed, the transaction amount will be deducted from your total available credit.
Each month, your credit card issuer will send you a credit card statement showing your transactions, payments, past and new balances, minimum payment amount, and due date.
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Credit cards often offer a grace period, which is the period between the end of the billing cycle and the payment due date. If you pay your bill in full within this period, you will not be charged any interest.
If you have a balance each month, interest will be charged. Interest charges are calculated based on the amount you owe and the annual percentage rate (APR). APR is the annual interest rate you pay while you carry a balance on your credit card. In other words, you pay a price to borrow money from your credit card company. The higher the APR, the more you pay.
Tip: Pay your balance in full before the due date to avoid credit card interest. If you make a late payment, your credit card company may impose a penalty APR, which may be higher than the regular APR.
To fully understand how credit card payments work, you need to review the key items listed on your credit card statement. Your statement will include your transactions, payments, past and new balances, minimum payment amount and due date.
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A minimum payment is the minimum amount you must pay by the due date to keep your credit card account in good standing. It is usually a percentage of the total outstanding balance. Paying just the minimum payment can help you avoid late fees, but it can also lead to balances and interest accruing over time.
Available credit is the difference between your credit limit (the maximum amount you can spend on a credit card) and your current balance. Every time you make a purchase, your available credit decreases, and when you make a payment, your available credit is restored.
Your statement balance is the total amount owed on your credit card at the end of your billing cycle. Includes all purchases, cash advances, balance transfers, fees and any interest charges during the period. Paying off your statement balance in full before the due date allows you to avoid interest charges and demonstrates responsible credit card management.
Your current balance is the total amount owed on your credit card, including your statement balance and any new purchases you’ve made since the end of your billing cycle. It reflects the real-time balance on your credit card and can change throughout the month as you make additional purchases or payments.
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In addition to interest rates, credit cards may charge various fees. Find out what fees are associated with any credit card you apply for so you can manage your card responsibly and avoid unexpected fees.
Most credit card charges are clearly marked on your credit card statement. Different credit cards have different types of fees, so review your agreement guidelines carefully to avoid unexpected fees.
While all credit cards have certain features, such as credit limits, minimum payments, and APRs, there are many types of credit cards you can choose from depending on your financial situation and goals.
Credit cards can offer convenience, benefits like cash back rewards and the potential to build credit, but they also come with the risk of debt, fees and, if not managed properly, a negative impact on your credit score.
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To maximize the benefits of a credit card, pay off your balance in full each month, be aware of potential fees and interest, and understand the terms of any rewards programs.
While credit cards offer significant benefits, they can cause financial strain if you exceed your means. To avoid these pitfalls and get the most out of your credit card, use it responsibly and watch your credit score.
There are thousands of credit cards on the market. You’ll want to research and compare credit cards to find the right one for you. Look for these factors:
It’s also helpful to check your credit score to see what credit cards you qualify for. If you’re new to credit cards, premium travel rewards cards may not be affordable. A secured card or credit card may be easier to get approved for.
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With responsible use, credit cards can help you build a good credit history, which can lead to lower interest rates on other loans, such as mortgages and car loans. The rewards offered by credit cards are also attractive, especially if you spend a lot on certain categories, such as dining out or travel.
For most people, the benefits of using a credit card outweigh the drawbacks. With knowledge and self-discipline, credit cards can be valuable financial tools.
Responsible use of your credit card, such as making timely payments and keeping your credit utilization low, can help build a good credit history. However, late payments, high balances, and high balances can negatively affect your credit score.
The best way to use a credit card is to make the purchases you can afford and pay off the balance in full each month. This can help you avoid high-interest debt and prevent overspending. Learn about your card’s fees, rewards and terms to maximize your card’s benefits.
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You should consider applying for a credit card when you have a steady source of income and the discipline to manage your credit responsibly. If you understand how they work and can commit to paying off your balance in full each month, credit cards can be a useful financial tool for building credit and enjoying benefits like rewards programs.
Credit cards charge interest when you transfer your balance from one billing cycle to another. If you do not pay the full balance by the due date, interest will be charged on the outstanding amount, increasing the total cost of the purchase.
A credit card’s minimum payment is the amount you must pay by the due date on your statement. Your minimum payment can be a percentage of your balance or a fixed amount, whichever is greater.
You can get a credit card by applying online or in person at a bank or credit card issuer. They will review your credit history and income to determine if you qualify for the card. If approved, you will receive the card and a credit limit, which is the maximum amount you can borrow on the card.
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Credit card payments are usually processed within a few business days, but the time may vary depending on the credit card issuer and the payment method used. Pay before the due date to avoid late fees or a negative impact on your credit score.
If you pay in full by the statement due date, you will only pay the amount charged to your credit card. If you have a balance each month, you may also have to pay interest. Credit card companies may also charge various annual fees and late fees.
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Rebecca Lake has been writing about personal finance and business for nearly a decade. Her work has been featured on CreditCards.com, Credit Karma, Credit Sesame and other personal finance websites.
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This guide is for reference only. No financial, legal or tax advice is provided. You should consult your legal, financial or tax advisor for advice specific to your situation. Your state or local unemployment agency is responsible for making all decisions about your eligibility for unemployment benefits. If you have questions, contact your state or local unemployment agency.
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