Credit Card Basics – How Credit Cards Work
I came across an interesting article in the Chicago Sun-Times recently. The source of the article was www.themint.org which is a site that is geared towards teaching finance to kids. I think it’s worthy of writing about here because it stresses many of the important facts and components that make up a credit card. This is a summation of that article.
Credit Card Limit
Your credit limit is set by the credit card issuer and it dictates how much you will be able to charge to your card. The figure is arrived at by the credit card company which makes an estimation of how much debt you can handle.
Minimum Payment
The minimum payment on a credit card is the lowest amount that the credit card company will accept when you carry a balance from month to month. When a balance is carried over from one billing cycle to the next it is known as revolving credit.
Grace Period
The grace period is when you pay your bill in full and do not carry a balance forward to the next billing cycle. A grace period usually lasts between 25-30 days. It is basically a free loan.
Late Fees
Late fees are assessed on credit card account holders that do not pay their bills on time. Every credit card bill has a due date and if you do not make at least the minimum payment by the due date a late fee will be charged. Late fees can run as high as $35. But even more important than that, if you are late paying your credit card your interest rate will more than likely be raised substantially.
Interest Rates
It is important to bear in mind that when you use your credit card you are actually borrowing money from your credit card issuer. There is a cost of borrowing that money if you do not pay the amount in full before the grace period on your credit card ends. Depending upon your credit history, interest rates can range anywhere from single digits all the way up to 18% or higher.
Secured Credit Cards
Secured credit cards are becoming more popular these days, especially now that we are in the midst of a recession. The card is secured by a deposit that the cardholder makes to a savings or checking account. The money that you charge is then taken from that account.
Lost or Stolen Credit Cards
If your credit cards are ever lost or stolen you must notify your credit card issuer immediately. By doing so you will limit the amount of money you are responsible for when unauthorized charges are made to your cards. The limit is usually set at $50 but many times the credit card companies will wave that charge if you report your cards missing promptly.
We realize that these concepts are pretty basic as far as being a credit card account holder goes, but it’s always a good idea to review. Sometimes our lives get so busy that we lose track of some basic facts and take things for granted. We hope you have found this information to be helpful.
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