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What is a Credit Card?
For those just getting started, credit cards
can seem very intimidating. Especially with the current situation with the economy, many people seem to have a predisposed opinion that credit cards should be avoided at all costs. However, if used properly, credit cards can be a valuable tool for many. They can help to establish credit
, or to repair a damaged credit history. Before deciding to open a credit card account
, it is important to know exactly how these financial tools work.
For many people, their forage into the world of credit cards often begins with a pre-approved offer in the mail. These offers will typically begin arriving around a personís eighteenth birthday, when they become eligible to apply for one. Most of these offers will require the person to go online to call a specified telephone number in order to actually complete an application for credit. After this application has been approved, the terms and conditions of the card are spelled out, and the person must wait to receive their credit card in the mail, which usually takes a couple of weeks for processing. After the card has been received, it must be activated. This usually can be done by calling a toll-free number or logging onto the internet. Once the card has been activated, it is ready for use.
The way that a credit card works
can seem very complicated at first, but in fact it is quite simple. The creditor
, which is the lending institution that issued the credit card, will determine the personís credit limit. This is the amount that the person can charge on their credit card. This number can vary drastically depending on the companyís policies and the age and credit history of the borrower
. At this point, the person is able to use his or her credit card to pay for purchases. At the end of the billing cycle, which usually is one month long, the person will be responsible for making a payment to the credit card company. At this time, the borrower should receive a statement from the credit card company showing a payment due. The amount of this payment is calculated by the credit card company, and includes a portion of the total balance as well as accumulated interest. The exact method used to determine the monthly payment can be found in the terms and conditions of the credit card.
If the monthly payment is not made by the due date specified on the statement, a late fee will be added onto the total balance of the credit card. The amount of this fee varies depending on the individual company, but it is usually between thirty and forty dollars. If the borrower charges more than their available credit, they will be assessed an over limit fee. Again, the amount of this fee depends on the company. It is beneficial for the borrower to make their payments on time and to avoid going over their credit limit so that they do not incur these costly fees.
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