How Credit Cards Work: Detailed Explanation
Credit cards, when used correctly, are a convenient financial tool. They allow you to pay for purchases in stores and online around the world and have a grace period of up to 3-4 months, during which you do not pay interest to the bank. Unlike a consumer loan, the card does not need to be constantly “opened” again. Just pay off your grace period debt and use your card to pay for new purchases – the amount of available credit is replenished automatically. Read this article to find out how credit cards work for beginners.
What are credit cards?
A credit card is a plastic carrier that allows you to manage funds on the holder’s credit account. If you are not a bank client, then read the instructions on how to open a European bank account. The period in which you can spend money is called “reporting” and is activated on the day the card is issued, on the day of the first payment, or the first day of the calendar month – different banks have different conditions.
When issued, the card has a non-zero balance. The money available for spending is the loan that the bank has given you. This means that you can use a credit card with no money. These expenses cannot exceed the amount determined by the bank. You can use them to pay for goods and services, including communication costs, restaurant orders, and tuition fees.
How do credit cards work technically
The process of working with a credit card can be written in a few basic theses:
- You pay for the purchase within the available limit.
- Until the end of the grace period, no interest is accrued for using the loan;
- If you fully repay the debt before the end of the reporting period, then the full limit will be available to you in the new one;
- In case of partial spending and repayment, the credit limit is reduced by the amount of the debt;
- If the limit is fully used up, there will be no available funds in the new reporting period.
For most credit cards with a grace period, when withdrawing cash or transferring to an individual’s card, a loan with an increased interest rate is activated, and for some products, such an operation is impossible. For more information about how credit cards are used, ask your bank.
The credit limit is the amount you can spend. The size of the credit limit depends on the solvency of the client and the confirmation of his financial capabilities. Without proof of income, customers will have access to a credit card with a minimum credit limit. The higher the solvency of the client, the greater the amount of the credit limit. How do credit cards work in simple terms? You borrow money from the bank at a minimum interest rate without having to visit a bank branch. It’s like having a spare wallet in your bag. Having a credit limit does not oblige you to spend it. You can use only personal savings for several months. However, a lifeline in the form of spare money will always come in handy.
Try to fit into the grace period
The grace period for using the card is the period during which interest is not charged. The duration of this period is set by the bank. The duration of the grace period is different in different service packages, it can be as little as 30 days or more than 100. The client can choose a credit card with the ability to withdraw cash, a maximum limit, increased bonuses or cashback for all purchases, and a convenient grace period.
Please note that if the entire limit on the card is used up, repayment of the debt of the previous reporting period is required to open a new grace period. The interest for using the loan is calculated from the first day after the end of the grace period.
Special conditions may be set for high-risk merchants’ credit card processing. Because high-risk businesses are more prone to chargebacks, they need to pay higher merchant fees. You can find out detailed information on how credit card transactions work by contacting your bank’s support service.
Advantages and disadvantages of credit cards
Credit cards that work with Visa and Android payment systems have many positive aspects. However, customers should be aware not only of the advantages but also of the disadvantages of credit cards. What happens when you make a purchase using a credit card? What are the risks for bank customers? Read more about all the pros and cons below.
Benefits of credit cards:
- Credit limit;
- Interest-free period of use;
- Replacement of consumer lending;
- Possibility to receive cash if necessary;
- Bonuses and return programs.
However, the disadvantages of a credit card also deserve special attention. A neglectful attitude to the use of the product entails many problems in the future. Among the cons:
- High-interest rate and additional commissions;
- Impact on credit history;
- The complexity of the conditions;
- Reduction of the individual credit limit.
A credit card has more pros than cons. Given the characteristics of the banking product, you can avoid unplanned expenses for interest. However, in some cases, the use of the card may affect the reputation of the client. If you fulfil all the conditions of the contract and know the features of a credit card, there is nothing to be afraid of. To make transactions even safer, it is recommended to register with Paydo. It is a payment service provider that makes transactions with your credit card safer and more convenient.