Does anyone know how credit cards work?

Question

This might sound a little silly, but i really don't know much about them, and my husband and I just got one. Okay, if it's got a $200 credit line, and let's say we spend all 200, then it says minimum you can pay on the bill and the right amount your supposed to pay, okay, what happens if i pay it all, or just half, or minimum, i plan on paying it all, but i'm just wondering what would happen if we only paid half. And also, if we pay it all, Will we get the 200 back on the card next month after we pay it, what if we only pay 100 , will we only get 100 on it when we pay it?? Last question, How do we pay?? Do we send them a check, or can we do a money order, i know i should ask them all this, but i thought i'd see if anyone could help me on here first... Thanks! ????

Answer 1

The key about credit cards is that you're using BORROWED MONEY from the bank that issued you the card.  While the interest rate varies, if you don't pay off the balance complete, you'll incur interest & a small finance charge ($.50 - $1.00) each month.

First thing is that each purchase on the credit card has a "Grace Period" of about 25 days where no interest or Finance Charges are incurred, assuming you pay the amount off in full.

Using your $200 scenario, your minimum payment will probably default to $20 instead of the 3% (which would be $6)... Using 18% APR for your interest rate (while your default rate would be 24%), the 3 scenarios would be...

A) Pay Minimum of $20 -- give you $180 x 101.5% (18%/12 = 1.5%) + $0.50 = $183.2 Est. Balance...  or about 16% "Shrinkage" ($16.80 goes to the balance, $3.20 to interest)

B) Pay Half @ $100 -- give you $100 x 101.5% + $0.50 = $102 Est. Balance...  or about 2% "Shrinkage" ($98 to balance, $2 to interest)

C) Pay in full -- give you a balance of $0...  assuming you're within the grace period...  otherwise it could be $0.50 (the Finance Charge).

IMPORTANT NOTE:  Credit Card Companies compound interest DAILY & NOT MONTHLY, so the "Shrinkage" from interest will be slightly more than noted above.

So 18% ARP = 1.5% monthly = 0.05% daily (cased on 30-day months).  0.05% compounded daily comes to ~1.511% monthly or ~19.716% annually (based on 360 day banking year).

Needless to say, the more you pay off, the less interest you'll pay.

PLEASE NOTE THAT YOU SHOULD AVOID MAXING OUT YOUR CREDIT LIMIT!!!  If you go over your limit by a single cent, even if it's done from interest, you'll incur the "Over Limit" fee...  which can vary between $19 & $49 dollars, depending on your card terms.

As for payment, they'll take check & money orders as the easy method since they'll mail you a bill & note the minimum payment (which is either 3% or $20, whatever is greater).  However, most credit card companies will allow you to pay online directly from your savings / checking.  This is usually the fastest & easiest way to pay your credit card bill as it's normally processed in minutes (at worst, within 24 hours) instead of days (~5 days by mail).

It's VERY IMPORTANT that you keep up to date on your credit card bills as if your payment is late (usually by more than 3 days), you'll get hit with the late payment fee, which can varies between $19 & $49 (depending on your card terms).  If you do this more than twice in at least 6 months, you'll get bumped up to your "Default APR".  The Default ARP can value between 24-30%...

24% APR compounded daily turns into ~27.115% annually & 30% APR compounded daily turns into ~34.969% annually

You should be aware that some credit card company may try to s***w you over by using a "Universal Default" policy, which means that they can enforce the Default APR if you pay ANY BILL late (even something as trivial as a $5 late fee at a video rental store).  Again, read all the final print that's included with the credit card application to see if the issuing company uses Universal Default or not.

I'm not trying to scare you too much here, but you do need to be informed on how the credit industry will handle your bill & the potential pitfalls that you'll want to avoid.

Credit cards can be very useful if used responsibly, but they can really hurt you if you neglect it or go over your limit.  Hope this helps you out!

Answer 2

Okay, let's say you have a $200 credit line, and you spend it all.  They'll say your minimum payment is perhaps $20.

If you pay them all $200, great!  Now you have the full $200 available to you again, and you pay $0 interest.

If you only pay $70, then you will have $70 available (your limit minus the $130 that you still owe), and you will be charged interest on the $130.

If you pay nothing, you'll be charged a late fee plus interest on the full $200, and you won't be able to use the card until you pay off at least some of it (since you're at your limit).

And yes, you just send them a check to the address they'll print on your bill.

Generally, you should pay them off every month if at all possible.  Unless it's an absolute necessity like food, try not to buy stuff you can't pay off.  Otherwise, the interest (and interest on interest, etc.) keeps piling up month after month and the hole gets deeper and deeper, and you can very easily end up paying triple or more.

Answer 3

I just want to add 1 thing to Jons response.

If you carry a balance make sure that it's not over 30% of your limit or $60.00 the reason for this is if it is your credit score will take a hit.

Debt to credit ratio makes up a full 30% of people's score and anytime you exceed 30% your score drops.

Used correctly credit cards are the fastest way to build good credit.

Good luck.

Answer 4

whty r u only kinda luven marriage? whats wrong with it... maybe u shud get that fixed b4 you get credit cards w/ur hubbiee...

Answer 5

A credit card is effectively a short term loan.

The bank issuing the card pays for merchandise and you send the bank a payment at the end of the month.

Your credit limit is how much you can charge using the card.  If you try to go over that limit either the purchase will be denied or you'll pay a hefty fee.

Always pay the entire CC balance off every month.  Otherwise, you pay interest on both the unpaid balance AND every new purchase you make using the card.

Yes, if your credit limit is $200, and you have $100 in unpaid charges, then your available balance is $100.

When paying a credit card, a personal check works fine.  Just be sure it arrives at the CC company by the due date.  You can also pay many credit cards online now by direct transfer from your checking account.  That's what I do.  I can schedule a payment to happen on the due date.  That ensures the payment happens, I get a confirmation number so I know the CC company knows I've paid, and I don't have to worry about a check getting lost in the mail.

Answer 6

and the monthly statement will have the necessary disclosures don't forget and REgulation E in which it will be the right of the cardholder to gain