Woman speaking to a room full of people

Education Center

How Do Credit Cards Work

Credit card laying on top of a phone

 

Credit card usage has become so widely accepted as a part of modern life that many credit cards are accepted all over the globe.  Even in countries where you don’t speak the same language, certain credit cards can be used to make purchases.  Credit card usage is a convenient way to make your purchases easier without having to have cash on hand.  But just what exactly is a credit card?

A credit card is most often issued by a bank or other financial-service company, that allows cardholders to borrow funds up to a pre-determined amount, (your credit limit), to purchase goods and services with merchants that accept credit cards for payment.

One of the best features about credit cards is that your credit limit can be used again and again as your balance is paid down.  This feature means that as your balance is paid down, you can make additional purchases without having to contact your financial institution and request additional credit.  This feature alone makes a credit card one of the most versatile tools in your wallet.

It is important to understand that the use of credit cards is really an agreement by the cardholder, (you), to pay back the borrowed money, (the amount charged), plus any applicable interest or fees within a certain period-of-time.  The cardholder, (you), typically receives a monthly statement listing your purchases over the statement period, the balance owed, the minimum payment due, and instructions on how and where to make your payment.

As noted, credit cards are a convenient, quick way to pay for goods and services.  Additionally, credit card usage is typically safe for online purchases, especially valuable in a world where purchases are increasingly made online, but each credit cardholder must be wary about the pitfalls of irresponsible credit use.

Be Informed

Carefully read your credit card agreement to understand how your credit card works, where it might be accepted, where to make your payment, and make note of the contact information of the company issuing the credit card in case you may need to inform them of a lost/stolen card or changes in your personal information.  If you don’t have a copy of your credit card agreement, contact your financial institution and request one.

If you choose a credit card with a low introductory interest rate offer, be sure you know when that rate will increase and exactly how much that rate increase is.  Increased rates can cause hefty interest charges on unpaid balances.

Be alert to certain events in your credit card agreement that may result in additional fees such as paying your payment late or exceeding your credit limit.  Be aware that paying late may result in a suspension or revocation of your credit limit.

Some cards may impose interest rate increases if you pay your credit card late.  Often, these rates can be the maximum rates allowed by law and usually don’t revert to the lower rate when the credit card payment is brought current.

Understand how your financial institution handles returned or disputed items.  These events are much more common because of the increase in online commerce.

Being informed by reading your credit card agreement is the first step in responsible credit card usage.  Take the time to read this important document and contact your financial institution if you don’t understand the agreement.

Credit Cards and Your Credit

Remember, most credit card issuers do report to credit reporting agencies.  Responsible payment behavior such as paying your payments on time and not exceeding your approved credit limit will likely have a positive effect on your overall credit standing.  Conversely, poor payment habits and exceeding your credit limit may very well harm your credit standing.

If you for any reason cannot stick to the terms of the credit card agreement, contact the credit card issuer at once.

Responsible Credit Card Usage

  • Always be aware of your unpaid balance and just how much credit you have available.
  • A good rule of thumb is always keep your utilization below 30% of your credit limit.  
  • Only purchase from reputable merchants who commonly accept credit cards.
  • Never allow anyone to use your credit card for any reason.
  • Always keep your credit card on your person or in a safe place.

Pros and Cons of Using a Credit Card

 Pros  Cons
  • Responsible usage can improve your credit score
  • Fraudulently transactions can occur - only use your credit card on websites you trust
  • A credit card can provide immediate emergency funds
  • You may be tempted to overspend – consider your purchases carefully
  • A credit card can provide immediate access to purchases when you don’t have the cash
  • You can incur late fees and additional interest if you pay late
  • A credit card allows you to spend up to your approved limit 24/7
 
  • Credit cards are accepted in nearly every country
 
  • Credit cards allow you to make reservations for Hotel stays and Rental Cars
 

 

Credit Card Pro Tips

Read and understand your credit card agreement.

Always READ YOUR monthly STATEMENT.

Never purchase more than you need – leave an amount open for emergencies.

Never allow ANYONE to use your credit card – remember – you’re responsible.

Always maintain possession of your credit card either on your person or securely stored.

Immediately report a lost or stolen card.

Immediately report ANY suspicious credit card activity.

Questions?  Need Help? Contact a credit-card professional at any Drummond Community Bank.