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How Credit Cards Work

Financial advisers generally recommend getting a few credit cards as part of your overall financial plan. Credit cards prove to the financial community that you have the maturity to handle debt. This does not mean that you have to incur debt. Credit cards work slightly differently, depending on the issuer.

Credit Card Basics

A credit card represents a line of credit at a bank. The bank reviews your employment history, income, length of time at your residence, and credit report. They assign a score to your application. This score combined with your income determine the type of credit card offered, and your credit limit.

Source of the Money

When you make a credit card purchase, the bank that issued the card uses its money to pay the mer-chant. Some credit cards allow you to make cash withdrawals at an ATM. This is the same as borrowing money directly from your card issuer.

Credit Card Programs

Banks have different credit card programs for their various customers. If you have flawless credit and a good paying job, then you would qualify for a better card than someone with late payments and lower income. Differences between programs include the finance charge, grace period, late charges, and benefits or bonuses when using the card.

Finance Charge

Finance charge is the interest you pay to the bank for using their money. A good credit card has an in-terest rate below 12 percent. A bad credit card charges the maximum rate allowed under state law. Beware of zero percent introductory rates. That rate is only good for a few monthly cycles before it jumps up drastically, sometimes to more than 20 percent interest.

Grace Period

A grace period is the time period when finance charges do not accrue on new purchases. The best credit cards give a grace period on new purchases until the due date on the invoice. For example, as-sume you buy a pair of shoes on May 1st, your statement closes on May 5th, and the payment is due on May 28th. You would not have to pay any finance charge on the shoes if you paid the full balance of your account before May 28th. However, people with damaged credit are frequently issued cards without a grace period. This means you pay finance charge on every purchase from the day you buy it.