Millions of people around the world have credit cards, and they’re a huge part of the global economy. It’s no different in the United States, and credit cards are everywhere. If you have never had a credit card before and are wondering how they work, read on for some credit card basics.
How Do Credit Cards Work?
Credit cards are issued by banks and other financial institutions in the business of lending. If you want a credit card, you need to apply for one. Your application will contain questions regarding your financial picture. The most important thing credit card companies want to know is how much money you make and whether or not you’ve ever defaulted on a debt repayment plan.
Applying for a Credit Card
Let’s say you make $28,000 a year and have no debts, and have never had any. Now you want a credit card, so you apply for one. The credit card company will take a look at your application and then at your credit score. They will get your credit score from any one of the credit bureaus out there that review such information. So, the credit card company will get your credit information and history from the credit bureau. In this scenario, there is no bad debt out there, but by the same token, there is also no history of steady, timely payments on any form of loan. You’re sort of a blank slate at this point. So, since your credit report is neither bad nor indicative of being a good payer, they might offer you a card with a low credit line – say, $1,000 – in order to see how you manage your credit line.
The moment you get your credit card, you can use it immediately – so long as you activate it from either your home phone line or via the web. Now here his how your credit card works. Let’s say you go shopping and out for dinner a few times, and soon you’ve got a balance of $500. The credit card company will charge interest on that $500, and expect a minimum monthly payment of the interest and part of the principal (the $500). You can also pay off the whole $500 if you want, and have the $1,000 credit limit available again.