Many people know that the little strip of plastic they have in their wallet is a very powerful purchasing tool.
With just a swipe of this card, the card holder can go home with a television set, a refrigerator, or even a car ...
and no money need change hands ...
at least physically.
How do credit cards really work? If you hold a credit card, you are, most probably quite familiar with the process.
But if you're a relative newbie, you may have heard a lot of misconceptions about how these plastic cards work.
One common belief is that purchases made with credit cards always incur higher than normal interest rates.
This is far from the truth.
Before the matter is discussed in full, it is best that the basics be tackled first.
A credit card is normally issued by a financing institution (such as banks) or an independent card company such as American Express.
Before the card is given to an applicant, the issuing company would first need to make sure that the potential cardholder will be able to pay for the advances (purchases) he will make.
To prevent cardholders from making purchases that are way above their paying capacity, credit limits are established and these would depend mainly on one's salary, and to some extent, his credit rating.
When the cardholder makes a purchase, his payment (from his pocket) is deferred because the financing institution will advance the amount and put it on credit.
Before the goods are released, the merchant will have to verify that the card has sufficient funds to cover the cost of the item.
This is done by swiping the magnetic strip found at the back of the card through a verification machine.
This strip contains vital information about the cardholder (credit limit, credit available, etc) and once verification is done, the card holder will be asked to make a "promise" that the amount advanced will be settled.
In the past, the purchaser is asked to sign a receipt, but recently, technological advancements have made it possible for cardholders to acknowledge the purchase by plugging in a pin number, or merchants can verify authorizations by phone or the internet.
At the end of each billing period, the card holder is presented with a statement of account.
All the purchases made within the billing period are listed down and opposite each item, is the corresponding cost.
The total cost of all purchases is indicated on this statement, as well as the date when payment is due.
You are given the option to pay the total amount in full or pay only a minimum of the total cost (a percentage).
If you pay the total amount in full, you will not be charged any interest fees.
However, if you opt to pay only a part of the total, that's when the card will levy an interest charge on the total amount due.
If more purchases are made (and the total is not paid in full), the same interest rate would be applied to the new balance, thus it is imperative that you either pay your balances in full, or minimize using the card when you have outstanding balances.
An additional charge is added to your bill whenever you pay after the specified due date.
If you only charge what you can pay for, and pay on time, you won't have to worry about paying unnecessary interest charges or fees.
If you time your purchases right, you might be able to avail of special promotions wherein you can buy expensive items (furniture, appliances) on deferred payment, and you will only be charged interest after a specific period of time.
You can make your credit card work for you, or you can be a slave to it.
The power is in your hands because it all depends on how wisely you use this purchasing tool.
With just a swipe of this card, the card holder can go home with a television set, a refrigerator, or even a car ...
and no money need change hands ...
at least physically.
How do credit cards really work? If you hold a credit card, you are, most probably quite familiar with the process.
But if you're a relative newbie, you may have heard a lot of misconceptions about how these plastic cards work.
One common belief is that purchases made with credit cards always incur higher than normal interest rates.
This is far from the truth.
Before the matter is discussed in full, it is best that the basics be tackled first.
A credit card is normally issued by a financing institution (such as banks) or an independent card company such as American Express.
Before the card is given to an applicant, the issuing company would first need to make sure that the potential cardholder will be able to pay for the advances (purchases) he will make.
To prevent cardholders from making purchases that are way above their paying capacity, credit limits are established and these would depend mainly on one's salary, and to some extent, his credit rating.
When the cardholder makes a purchase, his payment (from his pocket) is deferred because the financing institution will advance the amount and put it on credit.
Before the goods are released, the merchant will have to verify that the card has sufficient funds to cover the cost of the item.
This is done by swiping the magnetic strip found at the back of the card through a verification machine.
This strip contains vital information about the cardholder (credit limit, credit available, etc) and once verification is done, the card holder will be asked to make a "promise" that the amount advanced will be settled.
In the past, the purchaser is asked to sign a receipt, but recently, technological advancements have made it possible for cardholders to acknowledge the purchase by plugging in a pin number, or merchants can verify authorizations by phone or the internet.
At the end of each billing period, the card holder is presented with a statement of account.
All the purchases made within the billing period are listed down and opposite each item, is the corresponding cost.
The total cost of all purchases is indicated on this statement, as well as the date when payment is due.
You are given the option to pay the total amount in full or pay only a minimum of the total cost (a percentage).
If you pay the total amount in full, you will not be charged any interest fees.
However, if you opt to pay only a part of the total, that's when the card will levy an interest charge on the total amount due.
If more purchases are made (and the total is not paid in full), the same interest rate would be applied to the new balance, thus it is imperative that you either pay your balances in full, or minimize using the card when you have outstanding balances.
An additional charge is added to your bill whenever you pay after the specified due date.
If you only charge what you can pay for, and pay on time, you won't have to worry about paying unnecessary interest charges or fees.
If you time your purchases right, you might be able to avail of special promotions wherein you can buy expensive items (furniture, appliances) on deferred payment, and you will only be charged interest after a specific period of time.
You can make your credit card work for you, or you can be a slave to it.
The power is in your hands because it all depends on how wisely you use this purchasing tool.