Understanding Credit Cards

Credit cards work on the basis of borrowing money. When a consumer is issued a credit card the credit card company attaches a certain amount of credit to the card. When a consumer uses the credit card to make a purchase the consumer is borrowing money from the card issuer in order to pay for their purchase. Then, at a later date the consumer must pay back the card issuer. If the consumer pays back the card issuer past the statement due date the consumer will typically be required to pay back the money borrowed plus a specified amount of interest.

Credit cards will always require a credit card agreement which describes the features of the card as well as the relationship between the credit card company and the consumer. These agreements are usually dense and complex and anyone interested in understanding these agreements better should check the CFPB credit card agreement webpage. As stated above credit cards work by borrowing money from the card issuer and then paying the card issuer back for all of the authorized charges plus any interest or fees. Once again the CFPB provides excellent resources for the consumer posting a survey of credit card features. This is particularly helpful for consumers who need to find credit cards with features to meet their needs and available in their state.

If a credit card consumer consistently pays their credit card bills on time then the credit card consumer begins to build their credit score, a number used to predict how likely you are to pay back a loan on time, higher. (Anyone interested in finding out more about credit scores should check out CFPB’s “How do I get and keep a good credit score?”). If a credit card consumer is unable to pay their credit card company back the consumer may get hit with extra fees and increased interest rates increasing the consumer’s credit card debt. Unfortunately, once a consumer starts falling behind on payments it becomes more difficult to pay the increasing debt.

One of the main dangers of a credit card are that the consumer can lose track of their spending and spend more than they are able to pay. It is important that a consumer keep track and budget their use of a credit card. Not only will this help a consumer build their credit score and keep their debt low but also notice and report unauthorized charges on the card.

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