How do credit cards work?

Credit cards are a popular way to make purchases. pay bills and even in some cases help manage debt They are very convenient, and many offer the chance to win rewards. Below we will outline some of the details you need to know about credit cards.

What is a credit card?

A credit card is a form of revolving credit. This means you can borrow when you need it. Don’t exceed credit limit and pay when the bill is due This means you don’t spend money when you make purchases with a credit card. Instead, you borrow this money against your existing balance and build up the balance. When you agree to open an account You agree to pay these amounts to your credit card issuer.

This concept of borrowing makes you the “borrower” and your card issuer or issuing bank the “lender.” As a result, lenders report your payment activity to credit bureaus. And your payment history is one factor in determining your credit score. This is a number that describes your creditworthiness.

Before we explain in detail how it works. Here are some important credit card terms to know:

Annual Fee: A fee that some cards charge once a year for card use.
Balance: The amount of money borrowed on your card that you have not paid.
Credit limit: The maximum amount you can borrow on your credit card.
Credit Card Network: Credit card networks authorize and process credit card transactions. Facilitate the transfer of information between merchants and issuers.
Interest/APR: Interest is the rate you pay to borrow money. The interest rate charged by credit card companies is usually stated as an annual rate known as the Annual Percentage Rate (APR) Interest is charged for each billing cycle in which you owe a balance. Your credit card may have a different APR for balance transfers. cash advance and purchase balance
Issuer: The bank or financial institution that issued your credit card. You can pay your credit card issuer.
Minimum payment: The minimum payment consists of a small percentage of your balance. Plus interest and fees due. The minimum monthly payment is payable before or on the due date.

Credit cards are mostly used for purchases and bill payments. And something will happen in seconds:

You can swipe, insert or tap your card on the card reader when paying. If you pay bills or shop online instead, you’ll need to enter your card information.
The merchant contacts your credit card issuer through the credit card network to authorize the transaction.
If approved The transaction is completed and the system transfers funds from the issuer to the merchant.

Each billing period (approximately 28 to 31 days) you will receive a statement containing all your transactions during that period. Total and minimum payment You may be given a grace period, usually 21 days, but this varies by issuer. To pay at least the minimum payment due.

If you don’t pay the balance in full Your issuer will charge interest based on your APR and remaining balance. The lender adds this interest to your balance. Unless you use a card with a low introductory interest rate. Making only the minimum payment can result in higher interest charges. Meanwhile, paying your balance in full means you only pay what you owe and may not incur interest fees.

Difference between debit card and credit card

The basic difference between a credit card and a debit card is that Credit cards allow you to borrow money. Whereas debit cards draw money from money you already have.

This difference has big implications for your money First, credit cards allow you to borrow more money and increase your purchasing power than you have available. with debit card You can use the money you already have and avoid debt.

This is because you borrowed money with a credit card. How it works can affect your credit score. Debit cards do not affect your balance. This is because you can only use the money you have in your bank account.

Types of credit cards

There are many types of credit cards to choose from. Each type is designed for different users:

Unsecured credit cards: Unsecured credit cards do not require a cash deposit. Lenders set your credit limit based on your credit report. Total annual revenue and other variables Depends on the company Most traditional credit cards are unsecured, such as:
Personal Credit Cards: Personal credit cards are designed for everyday expenses such as gas, groceries, entertainment, car repairs and dining out.
Business credit cards: Business credit cards are available for business-related purchases, for example if you buy office supplies for your home office or travel frequently for work. You can use your business credit card. A business credit card helps separate business and personal expenses.
Secured Credit Card: Secured credit cards require a cash deposit as collateral. and your limit is equal to or greater than the value of your cash deposit Keep in mind that Chase does not offer a secured credit card.

Credit Card Rewards – Travel and Cashback

Generally, Rewards credit cards give you different rewards for your spending. The type of rewards you receive are measured in different ways. So think of rewards cards in terms of their most popular rewards.

Cash Back Credit Cards: These earn you points that can be used for cash, statements, gift cards or shopping at various retailers.
Travel credit cards: You earn points or miles on credit card purchases. And rewards tend to be more valuable when used for travel and accommodation. Some higher-end travel credit cards offer additional benefits, such as annual travel credits. Access to airport lounges and TSA PreCheck®/Global Entry fee refunds

Why have a credit card?

Credit cards offer many benefits whether they charge an annual fee or not. Here are some examples:

Sign-up bonus: Also known as the new card member bonus. Sign-up bonuses are available on several cards. The issuer may pay you a one-time bonus for spending a certain amount over a period of time after account opening.

Rewards: Some credit cards allow you to earn rewards that can be redeemed for travel expenses, gift cards, cash back, and more.
Balance transfers: Cards may offer promotional APRs on balance transfers for a certain period. So you have time to pay off your debt. You may want to consider consolidating other credit card balances this way.
Introductory APR: When you open a new credit card, it may offer an introductory APR on purchases for a certain period of time. It can help you pay for large purchases or manage your credit cards more efficiently.
Build your credit score: Using credit cards responsibly and paying your monthly balance on time are important factors in improving your credit score. A higher score can get you better rates and terms on future lines of credit.

How to apply for a credit card in 4 steps

How to get a credit card in person:

Pre-qualification: Take advantage of any pre-qualification credit card offers you may receive in the mail. This is because it can reduce queries for important information.
Fill out the application: Once you’ve decided on a credit card, you’ll need to provide basic information about yourself and your estimated income.
Hard inquiry approval: Gives the issuer permission to formally investigate your credit history.
Get decision and activate if approved: The issuer will evaluate your credit and send a decision within 30 days if the account is approved. You will receive the card in the mail. Your card will come with activation instructions. You can usually do this online or over the phone in a minute or two.

Tips for using credit cards

Credit cards can ruin your finances and credit if used irresponsibly. Follow these tips to help your credit card improve your credit score instead of hurting it:

Set a Budget: Avoid credit card debt by setting a budget and sticking to it. Make sure your expenses are less than your income.
Try to make at least the minimum payment on time every month: If you do not have a balance, you may not be charged interest.
Use your card for everyday purchases: You may need to make purchases at gas stations and grocery stores. And many cards offer rewards for those purchases.
Track your score: Check your credit score regularly with Chase Credit Journey to see how you’re progressing. Make sure you don’t see any errors. This can have a negative effect on your score. And if such errors are found Report immediately