Credit Cards and How It Works

 

A credit card is a tool used in the financial world to pay for goods and services being offered by a merchant. Once the credit card holder offers payment using the credit card and the merchant swipes the card, upon the credit card issuer’s approval, the purchase is deemed complete. The obligation to pay is now with the credit card holder to the credit card issuer. The issuer in this case paid for the purchase and will now need to collect from the borrower. Of course, the issuer will charge interest fees for the use of their money.

Credit Limit

A credit card holder is granted a certain credit limit which they can consume to pay for such goods and services. This credit limit is being granted by the credit card issuer which is an amount they are willing to accommodate. Any purchase of goods or services made by the credit card holder will be validated against this credit limit. If the purchase is exceeding the available credit limit of the holder, the purchase will then be declined. Credit limits may increase upon the request of the holder and review of the issuer. In some cases, the issuer may increase the credit limit without notice to the holder.

Interest Fees and Finance Charges

It is important to be aware that a credit card holder makes use of the issuers money and services when they avail the use of the credit card. This in turn yields interest fees which are payment for the credit card holder’s use of the issuer’s money. Finance charges on the other hand are fees paid for the services being rendered by the credit card issuer and other penalties that need to be collected for any breach in the contract such as overdue payments. Interest fees and Finance charges are the ways credit card issuers earn money for financing your purchases.

It is important to understand the use of credit card. When the time comes that you do need one, these are the things you need to consider.