How credit cards work? – A great financial lesson

Learning how credit cards work requires a considerably steep background in economics and accounting. However, a simplified version of how credit cards work is that they lend you money which you then need to pay back to them by a set date (at least a minimum payment).

Credit card issuers may be your financial institution, a credit union, or another financial organization.

When you’re successfully issued a credit card, be aware that this is not free money. You are being lent funds as a way to buy services, which you now have a responsibility to repay on time in an effort to avoid accumulating interest, finance charges and added stress that you don’t want.

Credit Card Companies Are Banking On Your Failure

But credit card companies know, as good as some people’s intentions are, that everyone they lend money to will not be able to pay it back on time. For them, this means huge interest rates and late charges that they legally get to charge you with. This is how credit companies stay in business and make money. Some may call it evil; some may call it unfair – but really, it’s just how this business works, and if you’re ignorant to the game you will get eaten up!

It is your responsibility to educate yourself about these factors so that you can stay on top of the credit card game.

Always keep in mind that credit card companies aren’t giving you anything. What they are actually doing is supplying you with an unsecured loan. What an unsecured loan means is that you don’t have to offer any overhead for the loan in order to obtain a credit card.

Sidenote: Keep in mind that we’re talking about regular credit cards right now; these come unsecured. There are secured credit cards on the market as well, but that works based on an upfront security deposit that you pay. But we’ll talk about that later, maybe in another article, but right now let’s just focus on how traditional credit cards work.

It is very possible to take out a card even if you have no to low cash in your bank account. However, when payback time comes, if you fail to repay the money that you so happily spent with your credit card, you may end up in a steep situation where you are unable to make payments as a result of insufficient funds. This is when things can start to get r e a l nasty.

People want things. Some things that they really can’t even afford. And credit cards know this. That’s why they’re there to permit you to get such things. But slip up and they’ll be on your ass like a pit bull!

Credit Card Debt

Unfortunately this happens to many people and they wind up in all types of credit card debt. They gradually find themselves having to juggle multiple credit card bills that have ballooned out of control with no end in sight.

And even if they do try to at least make the minimum payment, they eventually realize that they’re getting nowhere due to the fact that all their tiny little payments are being eaten up by BIG FAT INTEREST!

Don’t be like this.

Take credit card ownership responsibly and learn to handle the power you have in your hands. Just like all pit bulls aren’t bad, all credit cards aren’t bad. Credit cards can turn out to be some of your greatest allies – or your worst enemies. It’s all in how you manage them.

If you don’t know how credit cards work, this can definitely set the stage for credit card issuers to prey on your monetary assets. Effectively learning how credit cards work can help you to become a savvy consumer and great business person.

Credit Card Issuers Are Constantly Sizing You Up

When learning how to credit cards work, you’ll also want to understand a bit of statistics:

Banks are in a position to assess whether or not a certain sector of society will be capable of paying their credit card debt, based mostly on past historical data and experience with the sector. Because of this, some people are allowed much larger credit limits than others.

A superb example would be platinum cards which can permit payments upwards of thousands of dollars per month. This is because this prime sector of people who are allowed platinum credit cards have proven to be capable of making those high monthly payments required of them.

Paying your credit card bills on time will boost your credit score and thereby strengthen your credit worthiness. So you better believe that once you have proven yourself to be responsible credit card user, credit card companies will pursue you like a hawk with even greater credit card offers! – even if you don’t need them. Yup! The less you need them; the more they’ll want you! But when you were down in the dumps and covered in debt, they didn’t want to have anything to do with you. Hmm, that’s kinda how things work in many aspects of life. Go figure.

Play It Smart!

So be wise and play it smart with credit cards. If you’re gonna be sought after by credit card companies, let it be in a good way with them showering you with better credit card offers and more rewards — instead of being sought after with all types of threats because you didn’t pay them their money back!

22 Replies to “How credit cards work? – A great financial lesson”

  1. “People want things. Some things that they really can’t even afford.” Unfortunately, that is part of today’s society. As a whole, individuals have gotten away from saving for what they want vs getting it now. For many, this creates an endless cycle that becomes next to impossible to get away from.

  2. This is a very interesting read, something I would like to share with my friends that don’t understand making the minimum credit card payment is only going towards the interest , not that big pile of debt.

  3. This is definitely a great breakdown of how credit cards work. It is sad that many young adults are trapped into thinking that credit cards are just free money. I think it is important for parents to teach their kids that credit cards can be very beneficial, but they can also be life-changing (and not in a good way).

  4. The article reads, “…banks are in a position to ‘assess’ whether or not a certain sector… ” …but I think they meant ‘access’, as in ACCESS all of your money and use it for their own gains. Also, seven paragraphs in, a ‘sidenote’ that answers the articles question stated, “..there are secured credit cards on the market…” Okay. Then why am I reading THIS? I want to read that article, you know, the one with the solution? In all honesty, I think everyone knows were getting screwed. But the majority of people like big houses and boats and will take it like a suppository to maintain that status. Overall good read, 3/5 JIMO

    1. Hi JIMO, thank you for your comment.

      “Assess” is in fact the correct word. Definition of Assess according to dictionary.com: “to estimate or judge the value, character, etc., of; evaluate”. And this in the context of what that part of the article is talking about.

      And as far as secured cards, this is not the kind of credit card that most people have. Most people have a traditional credit card to where a credit card company gives you a line of credit. But a secured credit card is mainly an “alternative” credit card option for people who have can’t qualify for a regular/traditional credit card. So this is why I’m focusing on the main and traditional credit card in this article. I just added that sidenote to be specific in what we’re talking about here in this particular article.

  5. I would say that kids are easily taken in by the glam and glitter of using a credit card. Your point on being responsible especially when paying is not be taken lightly. Unfortunately that is where most people struggle and get eaten up by the credit card companies. Good points for those who are just starting out on this credit card thingy.

    1. Thanks for your comment nubay. Many people can avoid the years of financial struggle if they just read and follow the tips in this article. This is written from hard long years of living in debt myself and ultimately wising up and busting out!

  6. I hope that more people read this and realize that making minimum payments doesn’t help you. The only real way to use a credit card is to make your purchase and pay it back (or make larger payments) ASAP!

  7. Great article! I’m fresh out of high school and didn’t really have the slightest idea of how credit cards worked. It does seem wiser to stick with a debit card, in my opinon, because you can’t really spend more than what you have. Just my two cents.

  8. This was a great way to break down what exactly what is entailed when signing up for a credit card. They need to teach these basics in high school! Kids go off to college and get inundated with credit card offers and many do not understand the consequences.

  9. Luckily, I was taught much of this information in highschool and as a senior, this information came in handy. Credit card use is an integral part of society, and as the debt piles up, as mentioned, every single day from people who have little insight on proper use, being taught this information at an important age, i.e. 18, is pertinent. Having a good credit score is a crucial thing in the real world and some people get so far into debt that their credit score affects so many pivotal decisions in their lives.

    1. Great comment Makayla! You were very fortunate to have attended a highschool that taught you about credit. Many schools just don’t stress the importance of this or touch on it at all. And you’re right, bad credit and debt ends up affecting the lives of so many people.

  10. Really all that needed to be said was done so in the tail end of the article – play it smart. Say for instance you walk into a store empty handed, grab a bottle of beer and say to the cashier, “I’ll pay for this later.” The cashier says, “Sure thing, it’s five bucks, catch is I’m going to charge you .50 for every hour you don’t pay.” No one would agree to that, it’s just silly. Same thing with credit cards, there is no reason why anyone must have them. The credit trap is one born of convenience, a symptom from luxuriating too long in our modern day affluence.

  11. Like Parker Webb said, this is something that should really be included in high school! I remember being bombarded with credit card offers when I started post-secondary, and had no idea what I was getting into. Four years and $25k of credit card debt later (on top of student loans) sure did give me a tough life lesson.

  12. My son was in fifth grade last year and was being taught about finances (how to write a check, how credit and debit cards work etc.) through a Junior Achievement program. I found it amazing that they were providing such a program so early, however, they don’t repeat the lessons in high school. So, I’ve taken it upon myself to have a make shift, homemade system for him at home. We definitely need more articles like this to open young people’s eyes.

  13. I think this is a great way to help people understand more on how to manage their credit cards and the debt that comes with them. It also creates a more knowledgeable view on how credit cards can help financially, but also being responsible.

  14. Credit Cards can either be your best friend or your worst enemy. I agree that it can be easy to just pay the minmum payment, but at the end of the day it won’t help pay off your debt. Pay the amount that your supposed to pay on time and you will find things so much easier. You should only use credit cards when you have to buy something big that requires you to put it on a credit card. If it’s something small I wouldn’t bother putting it on a credit card. If you can’t afford to use your debit card or cash then don’t spend money.

  15. You know, this is one of those things I wish I had learned many years ago and not the hard way. Frankly, it ought to be taught in high school. Anyway, I think I will file this away for my teenage family members so they can read it before it’s too late!

    1. You’re right. It ought to be taught in high school. But guess they want to teach students so many other things that they’ll probably never use in real life. The system is all screwed up. Thanks for commenting, do come again!

  16. Always best to educate yourself about what you want out of your bank services and what’s going to work best for your personal goals and lifestyle. Interest rates are a dangerous game to get tangled into, so if you don’t need a credit card, don’t hassle yourself with one. If on the other hand you feel it’s necessary, be intelligent about your purchases, educate yourself by understanding what you credit plan entails, and don’t be afraid to be in communication with your bank if you have doubts or questions.

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