Credit cards, if used properly can make your day to day life much easier. You will get a lot more freedom and comfort on your budgets and expenditures. Using a credit card is just like taking a loan and every time you use your credit card, you borrow money from your bank or credit card issuer and until you pay that among back, the credit card issuer will add certain interest charges to your account. Understanding how credit cards work can help you take all its advantages and use your credit card properly.
Here is some key information that you must know to understand how credit card actually works:
Credit Card Limit
Credit card allows you to borrow and spend up to a previously set limit and an agreed interest rate that is charged on that expenditure. Say for example if your credit card limit is $1000, you can spend up to $1000 every month or a given time period. Normally, the card holder chooses a limit but maximum limit is determined by evaluating applicant’s status like employment history, credit rating, minimum income threshold etc.
Repaying the Credit
You will receive a bill at the end of each month which will include the money spent plus the interest charges. Once you pay that bill, you will be able to spend up to your credit card limit again. The credit providers will set a minimum amount of repayment that you need to pay every month. It can be certain flat rate or a percentage of your spending. You need to make sure that you clear this repayment amount in time as failure to pay will be recorded in your credit rating.
Interest Free Grace Period
On most cards, there is a time period called the “Interest Free Grace Period”. If you can clear your bills within that period, you do not have to pay any interest. It can be 20 days to 55 days depending on card provider.
Rewards, Bonus Points and Interest Rates
These things vary from card issuer to issuer. So, it’s the duty of the applicant to know how he or she can earn rewards and bonus points. The card holder should also know the exact interest rate that applies to his expenditures.