How Credit Cards Work

Using credit might seem easy. You buy a new pair of shoes, gas for a road trip, or pay for dinner by simply handing over a credit card and signing a receipt.  Using credit allows you to pay for things you do not have enough cash to cover or it allows you to spread your payment over a couple of months.

But you want to be sure the way you're using credit is better for you than it is for the credit provider.

Who is involved when I use a Credit Card?

Buying on credit is a process that involves three parties: you, the seller you're buying goods or services from, and your Creditor.  The  creditor is the bank or other institution that provides you the credit to make your purchase possible. When you sign a credit card receipt or  provide your credit card number online or by phone you agree that the creditor will cover the bill for your purchase and then you will pay the creditor back the money (with interst of course).

The merchant or service provider you buy from also pays the creditor a fee, usually a percentage of the amount you charge. Part of the cost of doing business is making it easy for people to buy — and that's what credit does.  So the Creditor gets money from you and the Seller.

The Principal Idea
 

Did you know:

70% of college students have at least one credit card and of those students only 10% pay off the full balance each month.

In return for using borrowed money, like a credit card, you agree to pay back the principal plus interest.  Interest is charged on any unpaid balance which is calculated at an Annual Percentage Rate (APR).  This is where you can use credit cards to your advantage if you pay off your credit card in full at the end of the month.

Danger!

Credit Cards give you revolving access to a fixed amount of money, called your credit limit.  Revolving means that as soon as you repay the amount you have borrowed, you can use it again.

Example:

Only making minimum payments on credit card

What should I be looking at in choosing a Credit Card?

Before you use your shinny new Credit Card or apply for one make sure you know the following things about that card.

• Annual Fee: money a lender will charge you every year just to have the card in your wallet. No annual fee is what you want to find.
• Annual Percentage Rate (APR): this will influence your interest rate and ultimately the amount of money you will have to pay back.  The lower the number here, the better.
• Grace Period: amount of time the lender will give you to pay back the money before they start charging you interest.
• Transaction Fees: fees that will be charged at certain times when you use your card.
• Late Fees: if you make a late payment the lender will charge you for that.  This could be as much as $45 each time you forget to pay your bill on time.

What to avoid if you have a Credit Card:

Before you use your shinny new Credit Card or apply for one make sure you know the following things about that card.

• Never let anyone borrow or use your credit card. IOU's will not matter to a lender. You are responsible for paying the money back.
• Do not use your card as if it is FREE money! What you charge will ultimately need to be paid back. the amounts are billed and you will be responsible for payments. Remember, even $1,000 of debt (at a high APR) can take almost 12 years to pay off if you just pay the monthly minimum.
• A good rule of thumb is to not use more than 30% of your available balance.  Using more than this amount will hurt your Credit Score.

Opt Out from Credit Cards

Tired of getting constant offers for credit card offers. There is legislation that can help you stop receiving unwanted mail.  To Opt Out of receiving pre-apporved credit card offers in the mail, visit www.optoutprescreen.com.