How Does a Credit Card Work?
• Name. The full name of the account holder — the person who is responsible for paying the credit bill each month. • Issuer. The name of the company that is granting the credit and their logo. Issuers are usually banks and other financial institutions. • Type of Card. VISA, MasterCard, Discover, etc. • Account Number. • First Six – Identify the issuer. • Next four – Region/branch of issuer. • Next five – Your account number. • Final number – Digit for security. • Customer Service Number. This number is available if you should have any questions about your account or past transactions. There is also a number for lost or stolen cards. Write it down. • Magnetic Strip. This strip stores important information about your account such as name, account number, PIN, expiration date, and credit limit. • Expiration Date. Merchants require this information if you’re making a purchase by phone or the internet. It lists the date your card will expire in Month/Year.
Even if you don’t own a credit card, you’re probably familiar with the names of the major cards. Credit cards are used by just about everyone. But how do they work? And more importantly, how can you make them work for you? When you use a credit card, you’re paying for a good or service on credit. This means that you are able to receive the product without paying any money immediately, but you agree to pay back the credit card company at a later time.
Using a credit card is like getting a loan. It’s not free money. Every time you charge something, you’re borrowing money until you pay it back later—either that month or over a period of months. If you choose to pay the money back over time, the credit card company adds interest to your account that you must pay along with the purchase amount. For more credit card basics, go to How Credit Cards Work and listen to our Podcast.
Using a credit card is like getting a loan. It’s not free money. Every time you charge something, you’re borrowing money until you pay it back later – either that month or over a period of months. If you choose to pay the money back over time, the credit card company adds interest to your account that you must pay along with the purchase amount.
Paying the minimum payment on a credit card is one of the main reasons why so many people are currently in financial trouble. If you make purchases totaling $1,000, the minimum payment may only be $20 with only $10 going to pay off the principle and the rest is interest. Many people think that a $20 payment per month is nothing so they charge another $1,000 since it is only $20 per month more. Eventually they have total credit card debt of $10,000 and are making minimum payments of $200. Then they miss a payment and the bank increases their interest rate causing the minimum payment to increase to $300 which causes them to miss another payment which causes the bank to raise their interest rate and minimum payment further. Now they are paying a $400 per month minimum payment but most of it is going to pay the interest and it would take up to 20 years to pay off the credit card. Eventually they miss too many payments and they are no longer allowed to charge on their credit card and their
