Credit cards are one of the most popular ways to pay for purchases, but how do they actually work? In this blog post, we’ll give you a crash course in credit cards 101. You’ll learn about how credit cards work, the different types of credit cards available, and how to use them wisely. By the end of this post, you’ll be a credit card expert!
What Is A Credit Card?
A credit card is a plastic card that gives the cardholder a line of credit to use for purchases. When the cardholder makes a purchase, they are essentially borrowing money from the credit card issuer. The issuer then pays the merchant for the purchase, and the cardholder repays the issuer, usually with interest.
Credit cards were first introduced in the United States in 1950 by Diner’s Club. The card was initially created for business expenses and could only be used at restaurants. Although there had been charge cards before, this was the first time a card had been consolidated to be used at multiple merchants. In 1958, American Express released the first charge card which could be used for any type of purchase. In 1966, Bank of America released the first credit card that could be used anywhere.
Since then, credit cards have become a staple in American society. In 2017, there were over 1 billion credit cards in circulation in the United States. Different types of credit cards are now used for a variety of purposes, including building credit, making purchases, and earning rewards.
How Do Credit Cards Work?
A credit card is a small plastic card issued by a financial institution, typically a bank, that allows its owner to borrow money against the card’s credit limit in order to purchase items or withdraw cash.
When you use a credit card to purchase an item, you are essentially borrowing money from the credit card issuer. The issuer then pays the merchant for the purchase price of the item, minus a fee called the merchant discount rate. You will then have to repay the issuer the borrowed amount, plus interest and any other fees, such as annual fees.
If you do not repay the full amount that you have borrowed within a certain time frame, typically 30 days, you will be charged interest on the outstanding balance. The interest rate charged will depend on the terms of your credit card agreement and is based upon your credit rating, but is typically around 15-25%.
To avoid being charged interest, you will need to make sure that you repay the full amount of your credit card balance within the grace period. The grace period is the period of time, typically 30 days, during which you can repay your balance without being charged interest.
If you are unable to repay your balance in full within the grace period, you will be charged interest on the outstanding balance. The interest rate charged will depend on the terms of your credit card agreement, but is typically around 15%.
In order to avoid being charged interest, you should make sure to pay off your credit card balance in full each month. You can do this by making sure that your monthly payments are at least equal to the minimum payment due.
If you are unable to make your monthly payments, you may be charged late fees and your interest rate may increase.
It is important to remember that using a credit card can be a great way to build your credit history. However, if you do not use your credit card responsibly, you may end up with a high interest rate and a large amount of debt. You should ensure you understand how credit cards work before applying for one.
