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How Does A Credit Card Work?

Maybe you’re considering applying for your first credit card, or maybe you’re just curious. If you’ve ever wondered, how does a credit card work, you’re in the right place. Because we will be answering some important and mostly ask questions mentioned below:

  • How much does a credit card cost?
  • How does the minimum payment work?
  • How does a card’s cut-off date work?
  • How does the bank give you money you don’t have?
  • How does the business I make a purchase receive money from?
  • What happens if I don’t pay the bill of my credit card?

But first…

A brief introduction to credit cards.

A credit card is a financial tool that can make your life easier when making purchases and payments. Basically, this piece of plastic allows you to pay for things on the spot, and pay for them later when it’s most convenient for you. The key is that you have to pay for it, or you’ll end up paying even more. Thanks to what we call interests.

With your credit card you can:

  • Make purchases in physical stores and online in almost all establishments. Maybe not in the taquitos on the corner, but you would be surprised how several little ones are adopting platforms to accept card payments.
  • Direct debit services,that is, give permission to establishments that charge you your subscriptions automatically to your card. It may be that the charges of internet, water or electricity, you do them manually, but with the credit card, it could be automatic.
  • Have convenience because if one day you run out of cash, you can pay with your card instead of looking for an ATM.
  • Generate credit history. Every time you pay your card cycle on time, before the credit bureau, you will look like a good payer.
  • Withdraw cash. That we don’t actually recommend as you will be charged high commissions. Only do it in case of an emergency that requires cash. Which are few.

You will have access to a pre-established credit limit, which you can use as many times as you want. This, as long as you pay what you owe when you have reached the top. Aecomendamos do not bump your card. Better play it quietly.

How much does a credit card cost?

A credit card may be free for your entire life,or it may be the most expensive thing you’ll ever afford.

Alright… “How can the changes going be so intense?” you say.

There are cards without annuity,and we show you some that we recommend if you follow that league. If you get one of these (or others we didn’t mention in the article), you won’t pay anything a year to use it.

HOWEVER… there are some that ask you to use a certain number of times a month or for certain amounts, such as $200 a month. If you do not comply with it, you could be charged a little money, small but annoying, as a penalty. Don’t worry, this penalty is only monetary and doesn’t affect your credit history. If you are not going to use your card, better not take it out or look for one for emergencies that does not have an annuity or non-use commissions.

There are also credit cards with annuities. These annuities can cost you a few hundred pesos to a few thousand pesos. You may think that people are crazy to pay thousands of pesos in an annuity. However, cards with high annuities usually come with VERY attractive benefits.

Our recommendation:only apply for an annuity card if you see how you can get the most out of the benefits you will get.

But why did we say that cards can be the most expensive thing we could ever afford? To! That’s where the interesting part comes in. We will be discussing that in the upcoming section.

A secret? It has to do with interests.

What happens if I don’t pay the bill of my credit card?

How a credit card works to generate so much money to the bank is that it charges you interest. And excessive.

The first thing you should know is the interest rate on your card. Interest rates in Bangladesh & Mexico are mostly the highest around the world. That’s why you should be very careful to always be able to pay your card. If you go into debt for more than you can afford, you’ll see that you’ll end up paying more in interest than you originally owed. This is why we say that cards can be VERY expensive.

The second thing you need to know is your credit limit. Credit limits for new cardholders can range from $8,000 to $12,000 pesos. If you already have a credit history, you may be able to get larger amounts. This limit can be used as many times as you want because it is a revolving credit.

Revolving Credit

This means you can use your line of credit as many times as you want. As long as you don’t exceed your limit and pay what you owed. Let’s make it clearer with a visual example.

  • First they give you a jug (credit limit) filled with water. 20 liters. You can take whatever you want, whenever you want.
  • You serve yourself two glasses of water of 5 liters each. (Your glasses are your purchases)
  • Now you have 10 liters left in your jug.
  • But now your cut-off date is approaching. That is, the date where you have to replenish the water (the money they lent you).
  • Now you go back to step 1 if you returned all the water.

But what if you don’t pay for all the water? Well, they will start charging you interest on the “liters of water” that you did not replenish. And the next month, you won’t have access to the credit limit. You’ll only be able to use: Your initial credit limit – which you didn’t replenish.

But now you were in doubt about the cut-off date, right? If, “When should I pay the actual or total bill of my credit card?” is your question, don’t despair. Right now we answer it.

How does a card’s cut-off date work?

The cut-off date has to do with the time when “they charge you the jug.” (Review the previous example if you didn’t understand the reference. The bank divides the purchases of its users on a monthly basis.

Let’s say the first of June is when your monthly deadline begins. You have 30 days until your cut-off date arrives, that is, June 30. All purchases you make in June are added to and subtracted from your credit limit. The cut-off date is the day on which this process is calculated.

And what is my payment deadline then?

This date is NOT the same as your cut-off date. But yes, it means the last day you have to pay your card. Generally, this date is 20 days after your cut-off date. You may see this figure you owe as the “minimum payment to not generate interest.”

Be careful: there are two minimum payments. The minimum payment to not generate interest, and the minimum payment. They are not the same.

If you do not make your minimum payment so as not to generate interest… Guessed! You will pay calculated interest on the amount you owed. It’s a little more complex how interest is calculated. If you are curious how to calculate ordinary interest, enter this league.

Our recommendation:pay your card every month on the cut-off date. So you do not make balls with all the dates and you only have to remember one. If for A or B you forget or can’t pay, you have a few days of tolerance to organize.

How does the minimum payment work?

The minimum payment is the one you make so that you do not fall into arrears and are not considered to have given up on your debt. This will be allowing you to continue using your own cards. But please don’t, you already have a lot to pay.

The minimum payment is very simple, and is the point where the bank wants to keep all its customers. It’s just the point where credit institutions see that you can barely pay your card but where you generate more interest. That is, you generate more money to the bank.

People who can only afford the minimum can get stuck in their debt for years. That’s why at Digitt we help people get out of their credit card debt with refinances at fair rates. Here’s an example of how we did it with Alberto.

Technical aspects of credit cards

We want to briefly answer other frequently asked questions of technical aspects for the curious.

How does the bank give you money you don’t have?

The bank has so much money in its control, that it can lend it to people without a problem. What’s more, if you have money on your debit card, the bank is surely using it to lend it to someone else. But if you require it, the bank has enough reserves to give it to you at the moment. Basically, the money you use when paying with your card is a promissory note for the business and not real money.

How does the business I make a purchase receive money from?

If the business receives a promissory note, how does it get money? The promissory note is hypothetical, but the reality is that the bank takes time to transfer the money from the purchase you made with your credit card.

Now you may already know how a credit card works! If you’re convinced to get your first credit card, we recommend doing your research first. Look for a bank that has a reputation for having good service because if you want to change banks, you will see that it can be a nightmare.

Written by Tuhin

I'm Md Waheduzzaman Tuhin and I've recently completed the B.Sc. in Engineering course. Currently, I'm working as a consultant and digital marketing specialist in Upwork. I'm also creating contents for blog and YouTube as well.

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