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Credit Cards 101:

Credit cards work exactly like a debit card except, you are borrowing money to pay for something with the promise to repay what you borrowed. What makes credit cards unique is that if you do not pay off your balance in full when your statement comes, you are charged interest on that remaining balance.

Here is an example of how a credit card transaction works:

 

  1. You swipe your card or if you are purchasing online you fill in your credit card information, just like you would a debit card.

  2. When you swipe the card or submit it for an online transaction, the credit card company then makes sure the card is valid and authorized for the purchase amount. If everything is confirmed, the transaction is authorized and goes through.

  3. The bank or credit card company then pays the merchant.

  4. The purchase will now show up on your statement, you then pay back the credit card issuer at the end of the month or statement period. If you fail to pay back the full amount, it is not the end of the world as you will simply be charged interest on your remaining balance. It is important to not let that remaining balance get too high as the debt can pile up and may be difficult to pay off.

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Credit Card Interest Rates and How it Works:

When a bank or any other financial services institution lends money, they typically charge interest. Interest is a payment charged by a financial institution for the service of lending money. What makes credit cards unique is that if paid off fully by the grace period of every statement, you won’t be charged interest. However, if you carry debt, and do not fully pay off your credit card at the end of every grace period you will then be charged interest on that remaining balance.

A quick breakdown of exactly how interest works are as follows:

 

    1. When first getting a card, you are presented with an interest rate or APR for your credit card. The interest rates on your credit card will most likely be based on your credit score. Typically the higher your credit score, the lower the interest rate will be.

    2. Interest rates will be listed on your credit card statement. In most cases, interest is charged on a daily basis. For example, if your credit card interest rate is 15%, then you will be charged approximately 0.41% a day on your outstanding balance.

    3. At the end of the billing cycle, your credit card issuer will calculate how much you owe.

    4. Your credit card company will present you with your minimum payment. This is the amount of interest charged. Credit card interest generally does not compound — meaning, it does not get added into your balance. You have to pay your full interest cost each month.

    5. In most cases, Credit card interest does not compound — this means that it does not get added into your balance. You have to pay your full interest cost each month.