Basics of Credit Cards

Credit cards are financial tools that allow users to borrow funds from a pre-approved limit to make purchases, pay bills, or withdraw cash, with the agreement to repay the borrowed amount at a later date, usually with interest if not paid in full by the due date. Here are the basics of how credit cards work:

How Credit Cards Work

1. Credit Limit:

   • This is the maximum amount of credit that a card issuer extends to the cardholder. It varies based on the cardholder's creditworthiness and the type of card.

2. Making Purchases:

   • Cardholders can use the credit card to pay for goods and services at merchants that accept credit cards. The card issuer pays the merchant, and the cardholder’s available credit limit decreases by the amount of the purchase.

3. Billing Cycle and Statements:

   • A billing cycle typically lasts about a month. At the end of each cycle, the card issuer sends a statement to the cardholder detailing all transactions, any interest charges, fees, and the minimum payment due.

4. Minimum Payment:

   • This is the minimum amount that must be paid by the due date to keep the account in good standing. It is usually a small percentage of the outstanding balance.

5. Interest Rates (APR):

   • Annual Percentage Rate (APR) is the interest rate charged on unpaid balances. If the cardholder pays the full balance by the due date, no interest is charged. Otherwise, interest accrues on the remaining balance.

6. Fees:

   • Common fees include annual fees, late payment fees, over-limit fees, and cash advance fees.