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How Credit Cards Work

Learn more about how credit cards work and what terms you need to know regarding them.

If you’re considering opening up a credit card, it’s critical to know the details. Understanding how credit cards work is at the heart of that process. This doesn’t just mean knowing the features and benefits of your particular card, or when to make payments, but the full workings of how credit cards are used. 

The Basics Of How Credit Cards Work 

Credit cards are a line of credit. A lender agrees to provide you with access to a set amount of money. Let’s say they offer a credit line of $1000 - That means you can make purchases on the card up to $1000. You can use the card anywhere it is accepted. Today, that’s very versatile!

When you make a purchase, your balance increases and your available credit line decreases. 

For example, if you charge $100 worth of groceries you now owe $100 on your credit card and your available credit limit drops to $900. Your lender will send you a bill for $100, but you don’t have to pay the entire balance off at once. Rather, you must pay the minimum payment established by your lender. The remaining balance is carried over to the next billing cycle.

Pretty convenient, right? Yes! However, there are fees and terms you need to know about when using credit cards. Let’s take a closer look at what happens after you’ve used a portion of your available credit.

Understanding Credit Card Terms & Fees 

A lender is required to provide you with a list of terms that outlines all of the details of the card. Read these carefully. By using the credit card, you are agreeing to the terms. 

Here are a few important terms to look out for:

Credit Limits

Your credit limit is the available line of credit and the limit to what you can charge on the card. 

Billing Cycle

This is the period of time you have to make purchases. When the period ends, you will receive your bill for what you’ve charged. 

Balance

Your balance is the amount you owe. You’ll see this listed on your credit card statement at the end of the billing cycle. This amount reflects what you borrowed as well as any accumulated interest.

Minimum Payments

Most lenders do not require that you pay the entire balance of your credit card at the end of the billing cycle. Rather, you have to pay a minimum amount which is a small percentage of your total balance. 

Late Fees

If you fail to make your minimum payment on time, most lenders tack on a late fee. Late fees can be expensive, and late payments may reduce your credit score. 

APR

Perhaps the most complex element of credit cards is the annual percentage rate or APR. This is the amount of interest charged to you for borrowing money. If you pay your balance in full during your billing cycle, there is no interest applicable to you. This is called the grace period.

The Cost Of Using Credit 

Interest is the fee you pay to use a credit card. As noted, if you pay off the balance in full during your grace period, you don’t pay interest. However, most people will carry a balance month-to-month. That is when the APR applies. Lenders will communicate what your interest rate is before offering you a card. 

Also, be sure you read through the terms to know all of the other potential fees including:

  • Annual fees
  • Late fees
  • Balance transfer fees
  • Cash advance fees
  • Transaction fees for overseas payments

The Benefits Of Using Credit 

Credit cards give you a bit of extra spending power when you want to make a big purchase. If you use credit, make payments on time consistently, and keep your balances low, you will be engaging in positive credit behavior. This can help you build a strong credit score. 

Later, when you want to buy a home or a vehicle, a good credit score means you’ll pay less interest.

Finding The Right Credit Card For You

Lenders, like big banks and local credit unions, offer various types of credit cards. If you’re thinking about applying for a credit card, review your options carefully and decide what offers give you the features and benefits you need. You’ll be surprised at the different perks available, like zero interest on balance transfers, cash back rewards, points, and more. 

At Listerhill Credit Union, we offer two credit card options, Visa Platinum Cash Back and Visa Platinum Merchandise. Both cards offer low-interest rates, great features, and perks. In addition, these credit cards do not have annual fees and they offer rewards. You can choose cash back or points to use towards gift cards or travel experiences.

Ready to explore your credit options? 

Find the Right Credit Card

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Frequently Asked Questions

  • What does Interest-Only Mean?

    With an interest-only loan, you are only responsible for paying the interest on the amount you draw from the construction loan each month. 

    Here’s an example. 

    If you draw $15,000 in January, you pay 4.99% on $15,000

    If you draw an additional $25,000 in February, you pay 4.99% on $40,000 ($15K from January + $25K from February)

  • What is a Construction Loan?

    A home construction loan provides you with financing to build your dream home. 

    With terms up to 12 months, this short-term loan covers your costs, including land, contractor labor, building materials, and more, until your home receives an occupancy certificate.  

    Once your home is ready to move in, you will then secure a traditional home mortgage.

  • You might prefer an adjustable-rate mortgage over a fixed-rate mortgage if...

    • You plan to move before the introductory rate expires.
    • You want a lower payment during your initial payment period.
    • You think rates will drop in the future.
    • You are planning on relocating before the rate adjusts
    • You know you will be paying off the loan in a few years
    • You need to move fast and have limited time to secure a down payment
    • You do not qualify for a 30-year fixed-rate mortgage, but want a 30-year payment schedule
    • Your payment could decrease if the index against which your ARM is benchmarked drops
  • A 5/5 adjustable rate-mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first five years, then fluctuating every five years. 

    A 5/5 ARM is best if you want to lock in a low rate over a longer period and maintain the same rate over an extended time. 

    With a 5/5 adjustable-rate mortgage, you can go 10 years with only one rate adjustment, whereas with other lenders, you could experience up to six rate changes in the same time period.

  • A 3/3 adjustable-rate mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first three years, then fluctuating every three years

    A 3/3 ARM is best if you want to lock in the lowest rate, but over a shorter period and are okay with the rate fluctuating more often.