How Does a Credit Card Work?
In this video, we're going to talk about how credit cards work and how you can use yours to earn rewards, build a strong credit history, and get access to better loans and credit cards in the future.
To learn more and compare the best credit cards visit www.fool.com/the-ascent/credi...
First, the basics.
A credit card is tied to a revolving credit account at a bank. When you charge a purchase to your card, you're essentially borrowing money from that bank. The bank pays the store and you pay the bank back later.
You're allowed to borrow up to a certain amount at a time. This is known as your credit limit. Once you've reached your limit, you can't charge any more to the card until you've paid off some of your balance.
Before we go any further, let's talk about interest. When you spend money on a credit card, you will be charged interest on the amount you owe -- your balance. You won't be charged interest immediately though, as there's something called a grace period on all your credit card purchases.
At the end of each month, your credit card issuer will send you a bill. Your bill tells you your outstanding balance and the minimum amount you need to pay to avoid a late payment fee.
If you pay back your entire balance before the bill is due, you won't owe any interest. But if you don't pay back the full balance, the remainder begins to accrue interest.
How much interest you'll owe depends on how long it takes you to pay back your balance and your APR. Your APR is the annual cost of borrowing money, but your credit card issuer will actually charge you daily interest once the grace period ends.
To figure out how much interest accrues each day, just divide your APR by 365 and then multiply that by your balance.
For example, if you have a balance of $10,000 and a 26% APR, you'd divide the 26% by 365 to get about 0.071%. That's your daily interest rate.
Multiply this by your $10,000 balance and you can see that you'd accrue about $7.10 in interest that day, leaving your new balance at $10,007.10, assuming you don't charge any more to the card.
But here's where it gets dangerous. The next day, your credit card issuer applies your daily interest rate to your new balance -- in this case, $10,007.10 -- so your balance grows by $7.11 that day, bringing your total to $10,014.21.
The next day, you pay the same interest rate on this larger balance, and suddenly you owe $10,021.32. Credit card debt can also hurt your credit score, especially if you max out your credit card or spend close to your credit limit every month.
Ideally, you should only use 30% or less of your available credit to keep your credit score high. So if you only remember one rule about using a credit card, let it be this: Never charge more to the card than you know you can pay back at the end of each month.
If you pay for your purchases in the month you made them, you won't have to worry about interest at all. If you do carry a balance, try to pay it down as quickly as possible. Reduce your spending, don't charge any more to the card, and consider a balance transfer card or a personal loan. You can find loan and credit card recommendations on The Ascent's website www.fool.com/the-ascent/perso...
So if credit cards can be so costly, why do we use them? There are a few reasons.
First, they're a great way to help build credit and show that you can handle borrowed money responsibly. You'll find few banks are willing to work with you unless you can prove you've borrowed money before and successfully paid it back.
The second reason is security. This is especially important for people who shop online. If an identity thief gets hold of your credit card number and makes a bunch of fraudulent purchases, all you have to do is call your credit card company, explain the problem, and it'll remove the fraudulent purchases from your bill and send you a new card. This is a lot safer than using your debit card as that's tied directly to your bank account.
But most people's favorite reason for using credit cards is the rewards. You can either get direct cash back, or gift cards to popular retailers from cash back cards. Travel rewards cards give you miles you can use toward airline and hotel purchases and sometimes other perks, like free travel vouchers.
Balance transfer cards have 0% introductory APR periods that are great for those who are trying to pay off existing credit card debt.
If you want to get the most out of your credit card, you should choose one with rewards you want that also match your spending habits. Use this card as often as you can to earn rewards faster, but never lose sight of the bill that will come at the end of the month.
A credit card can be a great tool for building your credit, shopping safely online, and getting rewarded for purchases you were going to make anyway.
Keep these tips in mind when shopping with a credit card to stay out of debt and get the most out of your card.
Пікірлер: 200
So basically we should get a credit card and just use 30 percent of it each month and pay it back on time or ahead so we don’t get charged interest and that’ll also improve our credit
@DaPurpleWarrior
2 жыл бұрын
@@brandonbaer9552 Give this guy a clap seriously that's super helpful thank you
@brandonbaer9552
2 жыл бұрын
@@DaPurpleWarrior your welcome
@bop8017
2 жыл бұрын
@@brandonbaer9552 h
@nick_sometin7791
2 жыл бұрын
@@brandonbaer9552 where do I pay it back, with my debit card?
@nick_sometin7791
2 жыл бұрын
@@brandonbaer9552 I'm even more confused I'm 17 so I'm trying to learn as much as I can, I'm always working to get money to start of on
Again thanks for our school system for not teaching this. Salute sir👏.
@sleepo5881
2 жыл бұрын
Funny enough they do, Most people just choose not to take it! Financial Algebra goes over all of this plus more
@ulakaipale5707
2 жыл бұрын
@@sleepo5881 not high school sir:(
@kurisublu2
Жыл бұрын
It's weird cus my last year of high-school there was a optional class that actually taught you this socks it had to be a optional class
@aneeshpunnam5703
Жыл бұрын
@@kurisublu2 For me its mandatory. I'm here for my high school econ class. So, yay, I understand taxes and credit now!
@benbrasfield5092
Жыл бұрын
For real
So basically we should get a credit card because it’s better then a debit card but we should treat it like a debit card.
@theascent_money
11 ай бұрын
A little bit, yes. But the difference is that by using the credit you can also generate cash back, points, or rewards, as well as improve your credit score.
@AhmedxWrld
11 ай бұрын
@@theascent_money wait so can’t I use the cash I get from the credit card to pay for something then just pay it back with the cash I got from the credit
You know in Kuwait, they have a totally different way of doing credit cards. They just deduct whichever is the highest between minimum charge per month and the percentage of the outstanding amount and then they return back the money into the credit card, which you can use again immediately. You don't incur any penalty. It doesn't end and you don't have to worry about your credit score.
Thank you for the video mane, people like you in this new day age really are the hero’s that don’t wear capes
Thanks a lots sir, very informative and straight forward. Have a nice day and be safe
Thanks 4 the informative video! I haven't used any type of credit card yet! So I'm looking for insightful info like yours!
So basically when you use your credit card for something, you should pay it back ASAP and then your monthly bill will either be less or none at all?
@suhagrace3138
10 ай бұрын
Yes that’s what I got. So you can use it to build credit with like gas and groceries
just got my first credit card n my anxiety is bouncing
@sarvilius
3 ай бұрын
I feel ya
@coryscyrus
2 ай бұрын
😂
Thank you school for not teaching us these kind of stuff instead teaching us things like philosophy
@ishaboibradley5215
2 ай бұрын
Hey philopophy is cool 😢
Wow this taught me everything i need to know, thanks 👍🏾
I pay everything before my due date is that better then acutely paying when it’s so post to be paid
Sad that I’m just now looking this up at 27 but here we are 😂
@TNGMikey
2 жыл бұрын
Don't worry we are in this together ❤️. Late bloomers shine the brightest
@ariesprincess1578
Жыл бұрын
I always waited because I’ve heard so many people going crazy with credits cards so it made me have anxiety.
@Raiyah02
Жыл бұрын
I just turned 20 and now looking bc I tried to get stuff and was told “you have to buy it in full” 💀
@damnthatshistinks
Жыл бұрын
Same here lol
@cascasde
27 күн бұрын
27 year to 😂😂😮
Sorry for this stupid question but, lets say you dont touch the credit card for a month, do you need to pay more interest or just the monthly/annual fee?
This helped a lot Thank you
Thaks really great vidm quick and imformative
From 1:06 if you pay back your entire balance before the bill is due, you won't owe any interest BUT if you don't pay back the full balance, the remainder begins to accrue interest...
The most informative video about this.
im guessing the main reasons to use a credit card is because a) some purchases can only be made with a credit card and b) sometimes you wont have money in your bank account because your job hasnt paid you yet so you use your credit card in that moment and pay back that money when you get paid i only got a credit card cause my dad said having no credit rate is like having a bad one, especially when the time comes to buy a car/house
@andres.rivera.1821
3 күн бұрын
I mostly use the B option, especially when paying for gas. A coworker told me to only use it if you have to so that you won't have to pay back so much
Im getting one and I'm going to save up to pay it off however I'll use it for emergencys
So do people in the US actually pay stuff with their card even though they have no money in their bank? I have a credit card but I'd never spend more than I have stored in my bank account. The full credit card spendings at the end of the month will automatically get subtracted from my bank account. It seems so weird to me how normalized it is in the US to just buy stuff even though you have no money.
So ideally we have to pay it down as soon as possible we got the bill, if were not able to do that then we need to rethink our urgency of using cc
My brain hurts
@mr.paralysis9161
2 жыл бұрын
dont worry man! mine too. fuck i don't understand these shits.
@bettermebetterlife8975
2 жыл бұрын
Means this isn't a good enough video.
@Raiyah02
Жыл бұрын
No Fr 💀😭 I feel like Patrick star
@salma-pf5sj
26 күн бұрын
I got stuck at the APR and it’s the reason why I searched this video. I still don’t get it
Great video thanks for the explanation
Thank you!
Very good guide. Thank you very much ❤😊
Really great video 👍
I'm young but I'm trying to learn as much as I can. U said u get a limit to the amount of cash u can borrow right, if say I borrow more than 50 percent of the cash I can get each month but I pay it off before the due date, does that have a negative impact ? Cuz I thought about just borrowing cash each month but only what I know I can pay back before the month ends and carry up my credit score really fast or is that not how it's done ?
@eatyourvegetables1449
Жыл бұрын
What do you mean “50 percent of the cash”?
I want to start investing but don't know where to begin. Any advice or contacts for help?
@SelimOrdu
6 ай бұрын
It's wise to seek professional guidance when building a strong financial portfolio due to its complexity
@SercanKalsir
6 ай бұрын
Talking to financial advisors like Naomi Dean to reshape your portfolio is a smart move.
@kathleenmarie9894
6 ай бұрын
Certainly! I diversified my $25k portfolio across different markets.
@DianaWilliams-gw9fg
6 ай бұрын
I made a net profit of around $115k by investing in high dividend yield stocks, ETFs, and equity
@OguzBelhan
6 ай бұрын
That woman is a genius
Great! Thank you.
Thanks 🙏🏿
THANK YOU!!!!!
This is why I never even got a credit card. Until I was 30. No debt whatsoever even now. The fact there are confused kids on here is why I never messed with it. Use it to pay for things you already have money for. Then make sure it’s paid on time. Many cards have automatic monthly pay. You should set that up.
Thanks
How does the payment is structured? You pay off the amount you spend or the credit card company determines the amount you should pay every month? Thanks for your input
@SniperinShadow
Жыл бұрын
You pay off the Statement Balance
@mi3helle707
Жыл бұрын
@@SniperinShadow Just only the statement balance? Question, so if my CC limit is £1000, and so I only spent max £100 in one month. How much do I pay back before the period end? - The full £100 or say £90?
@Park_Place
Жыл бұрын
You ideally want to pay off the ENTIRE outstanding balance on your card or as much as possible. If you spent $100 and can't pay back $100, try to pay $70 or $80. Credit card companies will offer you a very low monthly payment, such as only $15 per month, but that's because they want you to carry a balance that will accrue interest.
@Park_Place
Жыл бұрын
@@mi3helle707£100 or as close to £100 as you can. Otherwise they'll charge interest on your unpaid balance.
Very helpful tips!! Just got approved credit card loan 😌😌
@theascent_money
2 жыл бұрын
Fantastic!
@PrincessMeganElsaBoo
2 жыл бұрын
@@theascent_money proud of myself 💗
Very informative and thorough video!
Very useful to see this ads! Thanks
does the bill automatically get charged or do i have to make sure to do it manually somehow? also, how do i pay off what i spend before the period where i have to? if anyone can help me out thanks
@theascent_money
Жыл бұрын
Your credit card won't automatically get paid off unless you've set up a recurring or minimum payment within the system. The payment due dates should be clearly outlined, either online or on the paper credit card statements you receive. Does that answer your questions?
I’m out of my home country and security team of my bank keeps cancelling my debit, even though I’ve told them countless times my travel specifics. so I was thinking about getting a credit card and only using it in emergencies(when my debit won’t work) Good idea or no?
@hrad392
2 жыл бұрын
This seems like a good idea to me. Just be aware of card skimming and things like that
I just want to build my credit I don’t know how to start
Is it recommended for furniture purchases? I have never used a CC before but I recently moved to a new place with no furniture of my own other than a dining table. So I am trying to, slowly but surely start getting the bedroom stuff etc.
@heath23d
2 жыл бұрын
I have, but paid at least 100 to $200 a month on the card. Sometimes I have been able to pay it off when I can.
So the accumulative daily balance is only if you don't pay your required monthly balance?
@alecmccullough2048
2 жыл бұрын
Yes
@sloanelaker1130
10 ай бұрын
No it's not they still charge U daily whether U the monthly required or not, they only stop the daily when you pay everything u owe them back
What happen we have the credit card and we couldn’t use it for few months.. like there is no purchase done… so does that lower the credit score?…
@theascent_money
2 жыл бұрын
Credit card inactivity, over a long period of time, can result in your card being closed so using it occasionally is recommended.
@yericapalot6134
2 жыл бұрын
@@theascent_money how long til they close the account ?
@basedbulgarian511
6 ай бұрын
@@yericapalot6134 That'll depend on the CC company. Usually, if you don't use it for a year they might cancel it, but a lot of companies will never cancel a card.
wooow.amazing info
What I don't understand is how do you pay it back. Does it pay itself automatically if u have money in ur bank account or u have to do it manually?
@Rico-hb1rz
Жыл бұрын
If think you have to pay it manually unless you have automatic payments activated
@basedbulgarian511
6 ай бұрын
When you get a card, on the account page with the CC company there will be a option to add your bank account details. From there you can either login every month and pay manually, or setup automatic payments.
If I had credit card, but I am not using it, is there any maintanence charges will apply?
@basedbulgarian511
6 ай бұрын
There are a few cards that charge annual fee which is listed in the Terms and Conditions, but with the vast majority of cards, there are no fees if you are not using them.
what if you don’t use the credit card??
How long should you wait to pay your purchases off. A week ,a month daily can it be paid after the purchase is made?
@theascent_money
2 жыл бұрын
Repay your purchases as quickly as you'd like - the sooner you pay them off the lower your credit usage will be, which is good for your credit score.
@bethblackburn2076
2 жыл бұрын
Thank you
@omarbermejo3294
2 жыл бұрын
So its possible to pay it as soon as you use it?
@pcpxbotendorastermace9948
9 ай бұрын
@@omarbermejo3294Lets say I had a credit card that started off with $0 balance. If I bought something for $10, I would wait a day or two to see that $10 show up on my current balance. Because if I tried to pay it down on the same day I bought it, it might still show up as $0 and they wont let me make any payments until that $10 shows up.
what if you pay it back a few hours later after you spend the money using the credit card? do you have to wait the whole month to build credit?
@jamielynn1210
Жыл бұрын
i’m wondering this too! if i use my credit card for a purchase online, and immediately make a payment to the credit account, how does that look? edit: i looked it up and it doesn’t really matter as long as you aren’t late on the payment
@myice-creamdreams3421
Жыл бұрын
@@jamielynn1210 its been three weeks and ive still not gotten a reply sooo IDK?? not sure if where you are you have a Teachers Credit Union like we do here in Tulsa OK but I just started building credit and put $250 in the bank and got a loan against it to pay back within 6 months and instead of using the money, I put that $250 in another account and set it up to auto pay back the monthly fee each month for 6 months on the loan until paid off and than my $250 became free again and in just six months I had gone from no credit to a 600 credit score. It peaked at 640 a few months back but because of lack of activity it dropped so apparently you have to keep using and replenishing, using and replenishing, or it drops this whole credit thing is gay! anyways best of luck Gurl pete
@Ginobili69
Жыл бұрын
@@myice-creamdreams3421 thank you kind soul
What happens if you spend zero dollars on a credit card?
@basedbulgarian511
6 ай бұрын
Nothing. There's a small chance that if you don't use a card for a long time (more than a year), the card company might call and ask that you cancel the card, but it's not common.
Why is online identify theft even a problem? Can’t it be easily solved by just using ur debit or credit card to buy a gift card? Then spend that gift card online.
So basically dont spend more than you can afford and pay your bill ahead of time and your golden?
Do you have to pay a monthly fee just for having the card?
@wraithwrldx3872
Жыл бұрын
I dont think so
@basedbulgarian511
6 ай бұрын
No you don't. There are some cards that will charge an annual fee just for having the card, and that's listed in the Terms & Conditions before you apply for the card.
I work more and get more done from home because I don’t have a commute or distractions.
@Incognito-ru9hk
Жыл бұрын
who asked?
Very good to
When I make a first purchase, do I have 30 days from the time I used the card or do I have until the end of the calendar month I am currently in?
@theascent_money
11 ай бұрын
Your credit card will have a payment schedule but that varies by card; if you log into your account you should see payment due dates.
Balance on a Debit card means you have money on the account. Balance on a credit card means you owe that amount to the bank. It's the most confusing thing to me. Can a Credit card even have money deposited?
Agreee
And how do I pay to those credit cards? Via debit card?
@basedbulgarian511
6 ай бұрын
On the account page with your CC company, there will be a link to add your bank account info (routing and checking account info), which is usually listed in your checkbook or your bank's account page.
This is need to be thaught at school
well I fucked up this month lol
Read the fine print. Better yet in god we trust. No no better better yet in debt we trust. You can always file BK no worry. Interest, balances, profit it’s all numbers and it’s infinity. Word of the day: Abundance Your wish is my command. You’re now wealthy AF!
Damm I should have waited to buy this ps5 smh 🤦🏾♂️ I swear my dad was right I gotta make smarter choices on what I really need and don’t need.
How can you check your APR?
@dbboykid10
2 жыл бұрын
If you have an online account it should show it somewhere in there
Wait a second... So I borrow my own money to pay back my own money... I don't understand this shi
@cristoferperez560
Жыл бұрын
That’s just how the US works or it in general just to show your responsible
As a european, i dont understand creditcards. The way the banks work here, work just fine tbh. I dont see the benefit of a creditcard
@basedbulgarian511
6 ай бұрын
The benefits are the points. I have a credit card that gets me 6% off all grocery purchases, another one that gets me 5% off fuel purchases, 3% off restaurant purchases, etc. You also get fraud protection, and a bunch of other perks.
@bramgierkink7485
6 ай бұрын
@@basedbulgarian511 i see :)
Bruh what is the point of credit cards when its the same thing as using cash or debit card? Just so that u can improve credit score? Really?? Dumbest thing ever created and people fall for it
@LeonCamero
3 ай бұрын
1 month later: I 100% agree with this, however, nowadays, especially in the U.S, credit is very needed. I can have over 100k in my debit, but without any credit, I can't make certain purchases. It's dumb ik.
@user-cn4cn8vz5x
2 ай бұрын
To build credit to buy a house won't ever be able to buy a house without it...
These past few days watching my crypto portfolio decline is very disheartening. Holding doesn't really profit much. Any idea on how to earn better on the short run?
Cash Choubey
Thank you!
Thanks