How does a Credit Card Work

A credit card is not free money; it is a loan to be paid back under terms described in the credit card agreement. Today, a credit card is practically a necessity, but beware. It is easy to get carried away with spending on it, especially if you are approved for a large line of credit.

As a collector for a major credit card company, my best advice is to use a credit card only when absolutely necessary. Purchases such as airline tickets or car rentals are the most common, and generally require a credit card as opposed to a debit card. If possible, pay off large purchases in only a few months rather than financing them indefinitely. If you can help it, avoid charging everyday items to the card such as luxuries (that frappuccino) and anything that can wait a few days until your next payday.

Interst rates, also known as annual percentage rates can vary from a 0% introductory rate to what is called a punitive rate at as high as 32.49%. One missed payment can send that low rate into the stratosphere, and depending on how many monthly payments you miss, that rate can increase periodically. Even one missed payment, by ONE DAY past the due date can send an introductory rate to as high as 17.99%, and chances are, there is no way to negotiate that back down to the original rate. Think about it this way. If you were to loan someone money under certain terms, would you reward them by reducing the amount of money they owed if they did not adhere to the original terms? A bank does not see lowering a rate on a customer who does not make timely payments as a good business decision.

On the other hand, if you are a longtime customer and always make your payments on or before the due date, the bank may reward you by increasing your credit limit (again, use caution), or sending you bonus checks with your statement, which give you a lower promotional rate for a given time period. Beware again-most cash advance, or access checks carry a fee, generally 3% of a balance transfer or check amount, or $75, whichever is greater. For example, if you transfer a balance of $1000 from a higher interest credit card, you will immediately be charged $30 just for the transaction. Also, if your credit limit is $1000, make certain you are transferring considerably less to the card. Over limit fees are generally $35 to $39 per month, depending on the credit card agreement. If you can pay off the amount of the original tranfer or new purchase within the promotional time perioud, you will save money by not having to pay the remaining balance at your regular interest rate.

If you miss your due date by even one day, you will be charged a late fee, which varies from $20 to $39, depending on the bank and the balance on the card. Late fees are charged by most banks at midnight on the day your minimum payment is due, and the collectors will be calling your house approximately 7-10 days after then to find out why you haven’t paid. Some people are irritated by the phone calls when the payment is only days past due, but the calls are actually a way of protecting your credit. Generally (again, depending on the bank) a payment missed my only one week will not be reported negatively to the credit bureaus. In addition, if your payment is, say 2 days past the due date but a week before your account is billed for the following month, your account will likely show as being current, but you will still be charged the late fee for not making the payment on or before the due date. If an account falls to 30 days past due, there is a risk that the bank will report the delinquency to one or all three credit bureaus.

If your account goes over the credit line you will be billed $35 to $39 for each month it is over the limit. When you add an over limit fee and a late fee, plus the finance charges, you could be wasting hundreds of dollars over time simply for missing payments. Sometimes, if a customer has fallen on hard times, those finance charges and fees can add up to huge amounts of over limit dollars which is very difficult to get back under control. Sometimes when this happens, the bank will close the account permanently, and you will have to go through the reactivation process if you need to use the card later on. Some banks do not allow a charge to go through if it is going to put the account over the credit limit, but again, be aware of your balance on the card, because other banks will allow more than one charge that will cause the account to exceed the limit. In addition, if your card is over the credit limit, or even closed, the late charges and over limit charges will still be billed. Not only will you need to pay for the original charges you incurred, you will not be allowed to put additional charges on the account, and you will have to pay for all the late and over limit fees that are billed. Only in extreme circumstances will a bank representative waive any of those fees. It depends on the situtation as well as the history on your account, that is, if you’ve had any fees waived in the past, and how many.

In closing, it is also good practice to pay more than the minimum payment due each month if you can. If your minimum payment is $50 and you pay $60, that extra $10 will be credited to your principal balance, which can help you to pay off the card quicker.

Credit cards aren’t evil, but they must be used with discretion and customers need to be aware of the conditions of the credit card agreement. Though it is difficult to muddle through the legal speak of the agreement, gaining at least a basic understanding can only help you later if you run into problems. If you have any questions about any aspect of the agreement, do not hesitate to call the customer service phone number on the back of the card. Those representatives are educated on how your account works and can explain in layman’s terms anything you don’t understand. Being shy or simply too busy to educate yourself could result in money wasted in fees and finance charges, and we all have better places to put our money.