How Do Credit Cards Really Work? -

How Do Credit Cards Really Work?

how does a credit card work

How do credit cards work?
A credit card may be just a piece of plastic that you can use to pay for things, but there’s more to the story. If you’re new to credit cards, it’s important to understand not just what they are, but how they work.

When you use a credit card to make a purchase, you’re borrowing money from the institution – a bank, for example, or credit union – that issued you the card. Every time you make a purchase, it’s like taking out a loan. When you make a credit card payment, you’re paying that loan back. You can pay it off in full immediately or piecemeal over time. If you choose the latter, interest will accrue each month, such that your purchase becomes more expensive the longer you take to pay for it.

Aside from being a convenient form of payment, credit cards frequently offer additional benefits. There are many different types of credit cards, depending on the benefits offered, including:

A travel rewards credit card is designed for frequent travelers, who can earn rewards when they use the card for travel expenditures and/or later redeem those rewards for travel-related perks, like free or discounted airline tickets and hotel rooms.

A cashback credit card gives you a percentage of your purchases back to you in the form of cash rewards. Depending on the card, you might earn a flat-rate of cash back across all your purchases or a variable rate that’s higher or lower according to the purchase category. For example, 4% cash back at supermarkets and 2% cash back at gas stations. Although options vary by card, cardholders typically have a number of redemption choices, including cash rewards for travel, gift cards or merchandise; a deposit into a bank account; or credits against charges on your credit card statement.

A balance transfer credit card is geared toward people who want to consolidate there credit card debt for the purpose of paying it down quicker. Balance transfer cards typically offer a 0% introductory APR for an extended period of time. During which you can transfer balances from other cards and allow them to sit – interest-free – while you pay them off. If you don’t pay them off, however, transferred balances begin accruing interest as soon as the introductory APR expires.

When a credit card offers a 0% introductory APR, that means its issuer promises not to charge you interest on purchases and/or balance transfers for a limited time. During that time you can carry a balance – i.e., defer paying your bill – with no penalty. This can be useful if you need to consolidate and pay down debt from other credit cards, or if you want to make a large purchase and pay for it over time instead of all at once.

A student credit card is designed especially for college students to help them learn how to use and manage credit. Because students typically have no or little credit history, they tend to have higher interest rates and lower credit limits than regular credit cards. In many cases they may be require to have a cosigner if the applicant doesn’t have sufficient income.

Some credit cards are designed especially for people who need to build credit. Especially people who are establishing credit for the first time. In addition, people who are seeking to rebuild their credit after previously damaging it. Such cards often are “secured” cards, which means they’re backed by collateral in the form of a cash deposit. If you use credit responsibly for a period of time, the issuer may eventually return your deposit

Store Credit Cards – may be easier to obtain and often have more restricted uses. Cards issued by a retailer for use only at their stores – also can be useful for building credit.

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