What Is Some Information on How Credit Cards Work?


Quick Answer

A credit card is used for making purchases that are paid for at a later date. If a transaction is approved, the card issuer pays for the transaction on behalf of the cardholder and then bills the cardholder for the amount of the purchase.

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Full Answer

When a cardholder makes a purchase with a credit card, he enjoys a grace period, which varies in length from card to card, until he is required to make a payment. If the cardholder pays the full amount of his statement balance during this grace period, finance charges are normally avoided. Balances that remain on the account beyond the grace period are subject to finance charges, which can be fixed or variable.

The maximum amount of credit that is available to a cardholder at any given time is known as the customer’s credit limit. When a card is used, the amount of available credit is reduced by the amount of any outstanding charges. If a cardholder charges more to his account than the amount of available credit, he may be subject to additional fees.

Certain card programs offer rewards as an incentive for their use. These cards may pay cash back, qualify a user for travel discounts, or accumulate points that can be redeemed to make purchases.

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