How do credit cards work

How do credit cards work?

Credit cards are specialized financial tools that can help us take control of our expenses and increase our purchasing capabilities.  Now, like all tools, improper usage can often create problems that put us in a tough spot.

To help you understand how to properly use a credit card, we’ve prepared a guide explaining exactly how they work.  Beyond this, we’ve also included resources for credit card offerings, financial managers, budgeting tips, and other related topics.

Breaking Down Credit Card Usage

Breaking Down Credit Card Usage

Before we delve into how they work, it’s important to give you a bit of information on what credit cards are.  In essence, credit cards are physical cards that utilize serial numbers, a chip, and a magnetic strip to communicate wirelessly with various POS systems.

These financial tools can be used to make purchases through both physical and online shopping centers.  Beyond this, credit cards can also be used to pay bills or withdraw cash so long as the card’s credit limit is not exceeded

Making Purchases

When it comes to physical purchases, credit card transactions can be initiated by swiping the card’s magnetic strip at any POS terminal and inputting a user-made pin.  Newer cards also make use of an EMV chip, which is used by inserting the card into a terminal.

Online purchases require a bit more work since the card’s specific details must be manually entered into a secure online POS system.  The difference here is that instead of a pin, the cardholder must enter a security code known as a CVV located on the back of the card.

Regardless of which method is used, the process is essentially the same.  The cardholder authorizes the transaction and the purchase is credited directly to the bank.  

Paying Credit Card Balances

Purchases made with credit cards are charged to your bank and paid immediately after your card has been successfully verified through the use of a security pin.  The number of purchases you can make is limited specifically by your credit limit.

These charges accumulate over time and must be paid off similar to a loan.  From what we’ve found, the grace period for payment is usually between a few weeks to a month before any penalties are incurred.

Proper Usage

At first glance, credit cards can seem foolproof as you simply swipe away and pay the balance off later.  The catch here though is that your credit card company will always charge a convenience fee or a percentage of interest based on your total balance.

With this in mind, it’s important not to let your credit card purchases get ahead of you.  Losing track of your credit card expenses is a surefire way to accumulate some serious debt in a short amount of time.

However, when they are properly used, credit cards can be an invaluable tool to increase your overall purchasing capabilities.  Beyond this, they can also help you build credit as your usage and subsequent payments are reported to the credit bureaus.

Now that we’ve covered the basic functions of credit cards, we sincerely hope you’ll have a better idea of what these unique financial tools can offer.