Credit Cards

Credit cards enable users to pay for items with the use of one card. Each time the card is used, the credit card holder enters into a contract by promising to pay for the good or service at a later date. Credit cards not only make everyday shopping easier, they also facilitate internet and telephone transactions.

How Credit Cards Work

Major financial institutions issue credit cards. However, it is not uncommon for larger department stores to issue the cards as well. Each time you make a purchase on your credit card, you are essentially borrowing money from the financial institution that issued the card. When making the purchase, you will be asked for your signature or your PIN number.

Electronic systems are set up to verify that the card you are using is legitimate and that your current balance does not exceed the maximum allowable balance on the card. If the purchase is made over the phone or over the internet, the credit card user will often be asked for a security number which is often found on the back of the card.

The credit card issuer will send a bill out once a month and the user is required to make a payment. Late fees are often imposed if the issuer does not receive a payment by the specified due date.

Understanding Interest

Unless the balance is paid off each month, a credit card issuer will charge interest on the outstanding amount. Every credit card has a different interest rate and it will usually be explained in the cardholder user agreement. Interest rates can be as low as seven percent or as high as thirty six percent depending on the borrower and the credit card issued.

Most credit card interest rates will be quoted as the Annual Percentage Rate (or APR for short). As the name indicates, this is the annual cost of borrowing money from the credit card issuer. Financial institutions will sometimes quote the monthly interest rate which will be lower than the APR. Therefore, it is important that you fully understand what the annual rate is to avoid being misled. Quoting the interest rate as an APR makes it easy to compare interest rates across different credit cards and different card issuers.

Grace Period

If you are looking to minimize your interest payments, most credit card companies will allow you to borrow interest free as long as the full balance is repaid by the due date. This is known as a grace period and it can be a good way to build credit without taking on a lot of debt. A grace period generally starts on the day that the payment is made using your credit card, and extends for a certain number of days later. Most credit card companies offer grace periods that are between twenty one and twenty five days.

It is important to keep in mind that grace periods are not offered for certain types of transactions. Some of these transactions include balance transfers and cash advances. Due to the absence of a grace period, interest will begin to accrue as soon as the transaction takes place. Therefore, it is a good idea to try to avoid or minimize these types of transactions.

Conclusion

Credit cards add convenience to our lives because they enable us to access short term loans and purchases products without physically being in a store. However, it is important to shop around to find the best Annual Percentage Rate in order to minimize your interest payments. If you are looking to build your credit rating, or are seeking a short term loan to purchase a product or service, taking advantage of the grace period will allow you to essentially borrow the money without paying interest.