Credit cards are financial tools that allow cardholders to borrow funds from a credit issuer up to a predetermined limit. Here’s a breakdown of how credit cards work:
1. Application and Approval
- To obtain a credit card, individuals need to apply with a credit card issuer (usually a bank or financial institution). The issuer evaluates the applicant’s creditworthiness, considering factors such as credit history, income, and debt levels.
- Upon approval, the credit card issuer establishes a credit limit, which is the maximum amount the cardholder can borrow.
2. Card Activation
Once approved, the cardholder receives the physical credit card and typically needs to activate it by following the issuer’s instructions.
3. Making Purchases
Cardholders can use the credit card to make purchases at merchants that accept that specific card brand. They can also use the card for online and over-the-phone transactions.
4. Credit Limit
The credit limit is the maximum amount of money that can be charged to the credit card. It is determined by the credit card issuer based on the individual’s creditworthiness.
5. Billing Cycle
Credit card transactions are grouped into billing cycles, usually lasting about a month. During this period, cardholders can make purchases up to their credit limit.
6. Statement
At the end of each billing cycle, the credit card issuer provides a statement to the cardholder. The statement details all transactions made during the cycle, the minimum payment due, the due date, and other important information.
7. Minimum Payment
The statement includes a minimum payment amount that the cardholder must pay by the due date to keep the account in good standing. However, paying only the minimum can result in accruing interest on the remaining balance.
8. Interest Rates
If the cardholder carries a balance from one billing cycle to the next, they will be charged interest on the outstanding amount. The interest rate is known as the Annual Percentage Rate (APR).
9. Grace Period
Some credit cards offer a grace period, during which interest is not charged if the balance is paid in full by the due date. Grace periods vary among credit card issuers.
10. Credit Score Impact
Credit card usage and payment history contribute to the cardholder’s credit score. Responsible credit card use, such as timely payments, can positively impact the credit score.
11. Rewards and Benefits
Many credit cards offer rewards programs, cash back, or other benefits. Cardholders may earn points for purchases, receive cash back, or enjoy perks such as travel benefits.
12. Security Features
Credit cards come with security features, including fraud protection, purchase protection, and the ability to dispute unauthorized transactions.
It’s crucial for cardholders to manage their credit responsibly, pay attention to their spending, and make timely payments to avoid interest charges and maintain a positive credit history.
