How Do Credit Cards Work?
A credit card provides you with the option to pay for items on credit. You are given a grace period, which typically ranges from 21 to 25 days. If you pay your balance within the grace period and by the due date, you won’t pay any interest.
Have you ever wondered about the process that takes place behind the scenes after you use your credit card for a purchase? It’s fascinating, yet simple!
Here’s a quick summary of the path that a credit card transaction takes when you buy something, such as a pair of shoes from your favourite store:
- When you use your credit card to pay for a purchase, your credit card information is sent to the retailer’s bank, which is also known as the acquiring bank.
- The acquiring bank then requests payment authorization from your credit card network.
- The major payment networks are Visa, Mastercard, Discover, and American Express. Once your purchase is authorized, the amount you paid will decrease your credit limit.
- You will see the purchase amount on your credit card statement, and you will be given a due date and the minimum payment amount you must pay. If you pay the full balance, you won’t have to pay interest.
How Is Credit Card Interest Calculated?
It is important to pay off your entire credit card balance each month to avoid getting into debt. If you only pay the minimum amount, you will face compound interest, which means your debt will grow quickly.
Most credit card issuers compound interest on your balance every day, so over time, you will end up paying interest on top of interest.
It is best to think of your credit card as a temporary interest-free loan. You can use it to make purchases and pay them off within the grace period, allowing you to enjoy your purchases for a few weeks before paying for them.
Types of Credit Cards
It’s not uncommon to feel overwhelmed when you’re trying to choose the right credit card. There’s an array of options to choose from. I’m here to make it simple for you, so I’ve provided an overview of the various types of credit cards available.
Student Credit Cards
If you’re a student at college seeking first-time credit, then a college student account could be a suitable option. A lot of student cards provide advantages like reward points for cashback, bonuses for good grades, and no credit score. In accordance with the Credit CARD Act of 2009, holders must be at least 21 years old or provide proof of income.
Cash Back Credit Cards
If you’re looking to cut back on expenses that you spend every day, the cashback credit card could be the best card for you. You can earn rewards in a variety of categories.
Certain cashback cards provide the same rate for all purchases, while others offer a different rate of rewards in certain areas.
For instance, you could receive 3% cashback on your grocery purchases as well as 2% cash on gas station purchases, and one per cent on different kinds of spending. There are also a few cashback cards with different categories that rotate every quarter.
High-Limit Credit Cards
If you have a good credit score and credit score, you could be eligible for a credit line with an impressive credit limit. These cards allow you to get rewards on expensive items.
Let’s say, for instance, you’re in need of a new refrigerator. You can purchase by using a credit card that has a high limit and earns plenty of rewards.
However, this is only possible when you pay your balance completely before the time of due. Therefore, you must be disciplined and have good cash management skills in order to use these cards effectively.
Starter Cards for Building Credit
You can create a strong credit history – and a credit score by using credit cards with care. No matter if you’re beginning to learn about credit or are trying to rebuild your credit score, here are a few credit cards that will aid you.
- Credit cards that are secured. These cards give you the chance to earn an excellent credit score or even improve a negative one. You must make a deposit; however, if you’re using the card in a responsible manner, then you’ll be able to get your deposit back once you’re ready to obtain a credit card with no fees.
- Credit cards for students. If you’re in school, this could be a good way to start creating credit. It is required to provide evidence of your income, even if you’re not yet 21.
- Cards for those with poor credit. The FICO score range for people with poor credit is between 300 and 579. There are a number of good credit cards available for this type of credit, but be sure to read the terms of the card and check for charges.
- Cards with fair credit. It is believed that the FICO scores for appropriate credit range from 580-669. Once you’re in the realm with acceptable FICO scores, you’ll have access to better credit card choices.
Rewards Credit Cards
These cards typically receive rewards in points, cash back, or miles. Each card has its reward program, as well as redemption options. Common ways to redeem your rewards include credit on your statement as well as free flights and hotel rooms, gifts, merchandise, gift cards, experiences, and many more.
A majority of these cards come with sign-up bonus offers, which can help you to start earning. If you choose the correct card for your purchases, you’ll earn rewards in a short time. I made use of airline miles to purchase two round-trip first-class tickets to Maui just a few months ago.
Already, I have enough reward points to buy first-class tickets to travel to Maui for the second time next summer. The best thing about earning rewards is that you can use them!
Here’s a brief overview of the various types of credit cards that reward you:
The cashback credit card. They are well-known, and I have discussed them briefly in the past. If you’re looking to save on the cost of everyday items like gas or groceries and other expenses, a cashback credit card can be a good option to add to your wallet.
I utilize a combination of rewards and travel credit cards. I make sure to use the right cards at just the right moment to maximize my rewards. It’s also possible in the event that you’re comfortable using several credit cards.3
Credit cards for travel rewards. These cards are generally designed for travel and offer various options that people prefer. For instance, you can redeem your rewards at hotels and airline partners.
Airline-branded cards. As the name implies, these cards are linked to an airline. An all-purpose travel credit card would be the best for those who want to be flexible. However, airline-branded cards offer excellent rewards and are a perfect option for those who have a preferred airline.
Hotel-branded cards. These cards are linked to a specific group of hotels and typically offer ample rewards and additional benefits. If you are a fan of a particular hotel, a card that is branded with the hotel could be a good choice. Look over the Best Hotel Credit Cards, which includes some of these credit cards.
Please have a look at our top rewards credit cards. Make sure you compare the cards to ensure you match the rewards with your spending habits. So, you will increase your earnings and save cash.
0% APR Credit Cards
Some credit cards provide zero per cent APR on balance transfers. However, there are cards that offer a 0 per cent APR introductory offer on purchases. Certain credit cards offer zero per cent APR on purchases and balance transfers. Make sure you read the fine print carefully.
The intro periods for balance transfers and investments sometimes work differently. Once the intro period has ended, you’re eligible for the regular APR for purchases set by your credit card issuer.
Travel Credit Cards
I’ve previously briefly mentioned the issue of travel credit cards. The card will determine whether you’ll earn points or miles when you purchase.
Under the umbrella of travel rewards, it is possible to choose an airline or hotel-branded credit card if you’re a loyal customer of a particular brand. The tips and sign-up bonuses are generally generous.
Some general travel rewards credit cards provide different kinds of rewards. For instance, I utilize My Chase Sapphire Preferred(r) Card to go out to eat since I earn three points per dollar I spend in this category. In addition, I’ve had the opportunity to take food orders through DoorDash occasionally.
Thanks to my Sapphire Preferred card, I receive free delivery through my DashPass. Since I love to travel, each time I use this card, I save money for my next trip.
A word of caution: Travel reward credit cards typically have annual charges. The fees usually vary from $95 to more than $500. Calculate how much you’ll earn in rewards and add the yearly cost. If your rewards exceed the price, then the card could be a suitable option for you.
Business Credit Cards
Credit cards for businesses typically come with great rewards and attractive welcome bonuses. If you’re a small-sized business, you’ll appreciate the tools for managing with these cards extremely useful.
The most effective credit cards for business, whether you earn cash back, points, or miles, also offer bonuses, like office supply stores, internet, and cable service.
If you frequently travel to work, you’ll be able to discover a wide selection of credit cards for businesses that offer attractive rewards for travel and other advantages.
Business credit cards can be utilized as a source of short-term financing. Look over these Best Corporate Credit Cards and find out the cards that offer rewards that are closely aligned with your business’s expenses.
Notice: These cards don’t provide the consumer protections that are provided through the CARD Act of 2009. Be sure to avoid having a balance and that you take note of all correspondence from the issuers in the event that any modifications occur to your terms.
Balance Transfer Cards
If you are in credit card debt and have a great credit score, applying for an account with a balance transfer could aid in saving money on interest.
The most popular cards offer zero-interest introductory rates for a set duration of time, which ranges between 15 and 21 months.
Credit cards for balance transfers typically require a fee to transfer the balance, generally between three and five per cent of the balance transfer.
Click On the Next Page and Learn How Credit Card Rewards Work: 
