Do you want to know How Do Credit Cards Works? Read this post to get complete information on how credit card processing works with simple step.
Almost everyone with job security and a stable source of income owns a credit card. A credit card makes it easy to complete day-to-day expenses without worrying about the balance in your bank account.
As convenient a credit card may seem, almost every credit experts unanimously agree on the fact that credit cards are really risky if not used properly. Every credit experts recommend people who are opting for a credit card to read the terms and conditions of their credit card lender thoroughly and carefully before picking up a credit card. However, if used in a decent manner, credit cards can be really useful and can help you to lead your life in a tension-free manner.
So, if you are someone who does not own a credit card as of now and want to get yourself a credit card in near future, then it is really important to know what a credit card actually is, how a credit card is different from a debit card and how do credit cards work technically. And today, we are going to address these three questions in the most perfect way so that everyone can understand the working of a credit card.
What is a Credit Card?
A credit card, as the name suggests, is a card authorized by a lender that allows you to take credit from the lender to make payments without actually needing to have the amount debited on your account before making the payment.
In simple words, if you own a credit card, the lender is lending you with credit which you are expected to pay back in a timely manner to the lender in order to avoid any sort of penalty.
A credit card holder can make use of the credit card almost anywhere in the world, from making purchases in supermarkets to booking airline tickets and movie shows. In today’s world, credit cards can be used anywhere. Please read this Beginner’s Guide To Credit Cards.
However, as mentioned above, the person who takes credits from the lender is expected to pay back the credit amount or at least the minimum payment of the previous month at the beginning of each and every month.
How Do Credit Cards Works for Minimum Payment?
In the above paragraph, you came across the term minimum payment. Many people get confused with the term minimum payment. Let us understand what a minimum payment is and how do credit cards work with minimum payments
Minimum payment is an amount that is repaid towards the credit that you have acquired from the lender. However, the minimum payment is not the entire credit amount but is an amount that is a sum of the interest and a percentage of the principal amount. The minimum payment is set in such a way that provided the minimum payment is paid off regularly and no additional debts are made on the credit card, can help credit card owners to pay off their entire credit debt with the lender in a few months.
So basically, the minimum monthly payment of a credit card is the combination of the interest of the principal amount that you have taken from the lender as credit and a percentage of your total principal amount. Whenever you pay off the minimum payment of a month, the existing interest is covered and the overall principal amount is reduced. So in the next month, your minimum payment will become less than the current month and this goes on until your credit debt is cleared off. However, if you keep on adding credit debt to your credit card, paying off minimum payment won’t help you in clearing your credit debt quickly enough.
The difference between Credit Cards and Debit Cards:
To understand how credit cards work technically, it is important to know the difference between a credit card and a debit card.
If you own a debit card, it is directly linked to your current account or checking account in the respective bank. And the amount that is present in your checking account is the maximum amount present in a debit card and the balance in your checking account gets deducted every time you use the debit card. Once your checking account balance reaches zero, your debit card value also becomes zero and no further purchases can be made using the debit card until you add up some cash on to your checking account.
Moreover, as you are using your own money from your own account and not taking credit from anyone, you do not have to pay any sort of interest for any transaction, except for some transaction fee that is individually set by the bank whose debit card you are using.
A credit card, on the other hand, allows you to take credit loans from the lender. The maximum credit amount that you can avail from a lender is dependent on a variety of factors like your current salary status and existing credit score.
A credit score is a measure of your credibility. People who haven’t availed a credit card yet will have no credit score and hence most new credit card owners opt for a secured credit card which is somewhat like your debit card but with the functionality of a credit card and also it helps in increasing your credit score really quickly.
It is also to be noted that if you fail to repay back your credit to the lender correctly, your credit score will face a hit and will drop. So always manage to maintain your credit score properly.
If you pay the amount that you have taken as the credit within the first 30 days back to the lender, then you do not have to pay any interest to the lender. However, failing to do so will add an interest amount to your principal amount that you have taken as credit, and the interest rate varies depending on the lender.
Did the above article help you in understanding how do credit cards work technically and how do credit cards work in minimum payments? We already write very good post on the complete information about credit card please read that.
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