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Money and Finance

How Credit Cards Work

Credit cards have become one of the most common ways to pay for things. You can use a credit card to buy just about anything from food at the grocery store to video games on the internet.

Using a Credit Card

There are two primary ways that people use a credit card to pay for something.

1) The first way is when the person is physically at the store. To pay for something at a store the credit card is swiped through a credit card reader. The reader looks at the magnetic strip on the back of the card. This strip contains information about the card. The reader then verifies the information and validates the purchase.

2) The other way to pay for things is over the phone or the internet. When using a credit card to pay this way, the person provides information including the credit card number, expiration date, full name on the card, and the card holder's address. They may also need to provide a number that is on the back of the card.

Where does the money come from?

When you first buy something with a credit card, the money comes from the bank that provided the card. Each credit card has a limit, however, on how much you can charge. This is called the credit limit.

Credit Cards Mean Debt

Every time you use a credit card, you are accumulating debt. You owe all this money back to the bank. Each month you will get a bill from the credit card company. There is a minimum payment due and an account balance. The account balance is how much you owe. The minimum payment is how much you have to pay that month.

Warning!!! You might at first think of credit cards as free money. They are not! Many people get into lots of trouble and lose everything they have by using their credit card too much. Watch how much you spend with your credit card and make sure you can always pay it back.

Interest

Important!!! Keep in mind that you will pay interest on the account balance if you don't pay it off each month. This interest can be very expensive. A lot of people get into big trouble by only paying their minimum balance. They end up paying hundreds (or even thousands) of dollars in interest. It's a good idea to always pay off your credit card each month. This way you get the convenience of using a credit card, without the high cost and the debt.

Credit Card Fees

Credit cards can have all sorts of fees associated with them. Some common fees include an annual fee, cash advance fee, over-the-limit fee, and late fees.

Other Credit Card Features

Some credit cards have some nice features associated with them. These may include airline miles, cash back, discounts, points, insurance, and even extended warranties on items you buy with the card. Keep in mind that each card has different features.

How old do you have to be to get a credit card?

At the time this article was written, a person had to be at least 18 years old to get their own credit card, but the laws may have changed. Even if you are 18, you will need someone to co-sign for the card or show that you have some regular income. In most cases, you need to be at least 21 to get your own credit card.

Someone older can add you as an authorized user allowing you to get a credit card at a younger age, but it's really their credit card that you are using.

Interesting Facts About How Credit Cards Work

Learn More about Money and Finance:

Personal Finance

Budgeting
Filling out a Check
Managing a Checkbook
How to Save
Credit Cards
How a Mortgage Works
Investing
How Interest Works
Insurance Basics
Identity Theft

About Money

History of Money
How Coins are Made
How Paper Money is Made
Counterfeit Money
United States Currency
World Currencies 		Money Math

Counting Money
Making Change
Basic Money Math
Money Word Problems: Addition and Subtraction
Money Word Problems: Multiplication and Addition
Money Word Problems: Interest and Percent

Economics

Economics
How Banks Work
How the Stock Market Works
Supply and Demand
Supply and Demand Examples
Economic Cycle
Capitalism
Communism
Adam Smith
How Taxes Work
Glossary and Terms

Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.

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