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How Do Credit Cards Work?

by Community Manager

‎03-13-2017 07:00 AM

Content provided courtesy of USAA.


“A credit card is not inherently evil or good,” says Mikel Van Cleve, a CERTIFIED FINANCIAL PLANNER™ professional and director of personal finance advice for USAA. “It’s a tool that if used wisely and with discipline can have benefits that outweigh the costs.”


It’s a tool millions of Americans employ to make easy payments, build credit and earn rewards. Unfortunately, undisciplined credit card practices can also bring significant trouble.


What happens when you use a credit card?

Whether you’re at a brick-and-mortar establishment, buying online or by phone, your card-issuing financial institution makes payment to the vendor on your behalf. The vendor pays a small fee to your institution, too, to offer you the convenience.


How does the bill work?

You’re obligated to send in a minimum payment each billing cycle, though you should aim to pay the entire bill off each month.


What if you don’t pay your full bill?

You’ll accrue interest on the balance. “If you delay paying your entire bill off for a long time,” says Van Cleve, “you could end up paying significantly more than the original price — just due to the interest.”


What happens if you don’t pay?

Cardholders who don’t pay the minimum can encounter bigger problems. If there’s no payment at all, then after 30 days the institution can make a report to the credit bureau. Further delays can have even worse results: Negative impacts to your credit report, lawsuits, late fees or penalties, and even a penalty annual percentage rate (APR), which increases your interest rate even more. If there’s still no payment at all, the financial institution may turn the account over to a collection agency, which could attempt to garnish wages.


How can you avoid credit problems?

“Don’t treat credit like free money,” says Van Cleve. “Think of it as cash; if you don’t have the money to pay back immediately, then don’t make the purchase.”


What about keeping your card safe?

Criminals who get your account info can rack up erroneous charges in your name, causing credit problems. Take commonsense precautions with your wallet or purse, and shop online only with secure, reputable sites. Don’t give passwords or account information to anyone who doesn’t need them, and certainly keep them out of sight at home.

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