How Does A Credit Card Work Exactly? (For Dummies/Beginners)

For just about anything you want to get off your chest about credit cards.
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How Does A Credit Card Work Exactly? (For Dummies/Beginners)

Postby missindependent » Thu Dec 13, 2012 10:54 am

I have tried Google searches and I guess I am not wording my question right because I can not find the answer to the questions I`m trying to ask.

I am a 20 yr old student in Alabama and I just applied for the Discover Student Credit Card and was approved. I'm curious on how exactly does a credit card work?

To help you get a better example of what I'm trying to say, here`s an example.

Let`s say I want to spend only $100 a month using my card. On purchases such as diapers and clothes for my children. How much would I pay back at the end of the month to keep/build my credit? Would I pay back $100, a little more, or less?

Also, what exactly is a credit card? Is it like "borrowing" money when your short? Like, if I have no money left for the month and I run out of gas, I would use my credit card to fill up, about $50. And I only used $50 on my credit card for the whole month, again, do I pay back the full $50, a portion, or do I pay back more at the end of the month?

I really hope I`m wording this right because even after reading through the papers I`m pretty confused. My only concern is not going into debt and being able to build my credit.

Thanks in advance.

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Postby jupiter » Fri Dec 14, 2012 7:43 pm

I'll try to answer your questions as best I can.

First - A credit card is essentially a month long loan from a financial institution like a bank or credit union, depending on who the card is issued by. When you pay with the card, the money at the time of the transaction is coming from the bank, not your checking account like what happens with a debit card.

As far as paying the card bill is concerned - when does the money actually come out of your wallet? You simply wait until the bill comes. The card bill will tell you both your balance for the last cycle, and the minimum payment that is due. You can write the card issuer a check for either amount and mail it in using the envelope mailed with the bill, or you can pay it online. Please note though: while you can simply pay the minimum balance and it will count on your credit score as having paid the monthly bill, you still have the extra money that is being left unpaid on your account. This is because the card issuer loaned it to you at the purchase time, but you haven't paid them back yet. This money won't go away until you pay it, and if you don't pay within the grace period credit issuers give for payment (usually 25 days), the balance will accumulate interest based on your APR rate, and you will owe the issuer more than you did before. So while you can pay the minimum balance, it isn't good for your wallet in the long term to do it.

So, to use your example and hopefully clear the fog in case the above explanation confused you - for $100/month purchases, when the bill comes, you would need to pay the minimum balance to help your credit, but you SHOULD just pay the full balance so it will not only help your credit, but you won't get hit with interest. Paying the full balance will also make you look MUCH better to the credit issuer and future institutions you get credit cards and/or loans from.

I hope that cleared things up for you.

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Postby Robrus1 » Sat Dec 15, 2012 7:57 am

A credit card is approval to borrow X amount of dollars from a lender, a little or a lot at a time. X is your credit limit, which is how much you are approved to borrow. You'll receive a monthly statement, and if you want to avoid paying interest, you should always pay the full amount that you borrowed/charged to your credit card. This will also keep you from going in debt. Don't charge more than you can pay off in a month, unless it's an emergency/special situation.
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Postby icewater » Sat Dec 15, 2012 11:05 am

I'm fairly new here. But, I did a lot of research as I too am just starting my relationship seriously with credit. In the last 3 months I received three credit cards am and going for a fourth.

What you have to realize is you can pay your card more than once a month. You can pay it 10 times a month if you want to. I pay twice a month. The reason for this is I have learned your credit card comes with 2 dates every month to be aware of.

One - The date your card "reports". This is when the card will report how much you owe to the credit agencies. On my card this is called the "closing date". I have heard that if it always reports a $0 balance that some creditors will consider this as the card is not being used and is just being "sock drawered" which is not a bad thing but does nothing for your credit. However, the other extreme is bad. To have 50% or more of your card balance being used is hurtful to your credit. I have heard different percentages as the sweet spot, but I think 2% to 10% is what you want the card reporting to agencies. So, TO BUILD CREDIT by the date your card reports have the balance down to between 2% and 10% of your credit limit.

Two - Once your closing date hits, you will have a "due by" date which is when your payment is due. Credit cards are almost a game. They want people to pay as much as possible, while you are trying to pay the least amount possible. Most people don't pay much attention and when they "carry a balance" that is have money due past the due date you give the card companies the right to charge you extra money for nothing. For this reason in order to NOT PAY ANY INTEREST, by the due date you want to have the entire balance paid off.

Every month you need to start at 0. Then charge everything on your card, use it like a debit card, then make sure and make payments to get the balance down 2%-10% by the "closing date" then pay the rest off by the "due date", rinse, repeat. That way you are building your credit, getting your credit limits increased, as well as not paying anything extra you don't have to. Now, as I am still fairly new I could be a little off, but this is how I have been handling it and would like if anyone understands things differently to let us know.
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Postby MemberSince99 » Sat Dec 15, 2012 8:04 pm

Since you have a concern about not going into debt, I'd like to address that. I think that is VERY smart. Do NOT abandon that.

The best way you can do that is to treat your credit card like it's a debit card hooked up to your checking account - if you don't have the money in the account to pay your balance immediately, do not use the card.

If you follow this, and pay your card, you simply cannot get into trouble with it due to spending issues. This is EXACTLY how I treat my cards. I never spend more than I could afford to put on my debit card right now. Then when the charges post I pay it. I don't even wait until the bill is due, I pay early, and this is done deliberately so that I can choose which card I want to report a balance to the credit bureaus each month. That's a different topic though.

Anyway if you strictly follow this advice you cannot get into debt. And having them pay you instead of you paying them is really pretty nice.

And as far as 'borrowing' money when you're short, technically yes, you are riding your debt on them for a time. Say you buy 50 dollars worth of diapers 2 weeks before your statement cuts. Then they give you at least 25 days according to Federal Law I believe to pay that money before you are charged interest so as long as you pay in full before that date, you won't be charged interest for it.

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Postby Snowman » Sat Dec 15, 2012 10:13 pm

Also to piggy back on what most of you have said, try to do what you can and pay before the statement cuts. That way the balance is reported at 0, or you can choose to leave anywhere from 1-10% of your CL to be reported.Up to 30% max you should use at any given time. I always PIF before the statement date, so that way I don't have much to worry about later on and my scores stay okay. Also like 99 said, don't use more then you can pay off because debt can sometimes get out of hand and you don't want to be in a hole since you are starting out. Basically a credit card is a short term loan you are taking from a bank or creditor. The bank or issuing institution is footing the bill and then you are paying them back later on. If you let a balance report it will also show you your minimum payment at the time (I.e. 5k CL, 300 balance, the minimum payment is a percentage of your balance that you have to pay. but it is best if you can pay it off ASAP.)

In essence this is what I advise:

1.) Never, EVER, and I cannot stress this enough, be late on payments. Based on the fico model, payment history is the biggest factor that they take in to account.
2.) Keep your utilization low. Anything from 1-30% is okay, but it is recommended that under 10% is best for your scores and to your creditors.
3.) Don't apply for too many cards at once. Inquires are typically on your CB's for 2 years (Equifax, Experian, Transunion).
4.) Do your best not to apply for cards that are kind of tough to get approved for right now. Such as Amex cards (most of them require decent credit, 680+ scores. The Gold Delta is the easiest to be approved for for as an Amex revolver as well as their charge cards. except for their platinum and Centurion cards. Their BCE is typically the toughest to be approved for, look at many credit articles that agree with the statement) Chase (any of their airline or hotel partner cards. Now if you have a high income, 70k+ they might be able to overlook your scores, but I would not be sure if some creditors allow this or not.)
5.) Most of the time, CL increases are Hard pulls (meaning the bank or issuing institution will view your credit report and scores in order to extend you more credit). Sometimes they can be soft pulls depending on how you use your cards.
6.) Be good to your creditors and they will be good to you. The credit industry is rarely forgiving and you want to minimize your inquires and mistakes as much as you can. If you don't get approved for any card, there is always a reason behind their decision. Don't worry about it or take it personal. Chase denied me for their Freedom card 3 weeks ago, I turned around and applied for an Amex and they approved me.
7.) If you can, plan when you app. Meaning get your inquires done at the same time so that way it will all fall of at the same time. Don't do what I did and apply in October and then in Just apply when you think the time is right and make sure that your scores are as good as they can be.
8.) Lastly, EX does not sell credit scores anymore, so the only way to find out is when you apply for a known EX puller (Amex and Citi). Or a mortgage. Credit sesame has the somewhat closest EX score for you. If you don't mind paying nearly 40.00 you can buy your actual EQ and TU scores from the myfico website.
9.) Make sure also that you make your payments on time for everything because they are on your credit reports, one late payment can drop your scores a bit. Bankruptcy as it is shown causes the biggest score drop along with charge offs (CO's) and other derogatory information on you.
10.) Lastly (again), From what I have read on the boards and on other websites, avoid capital one, the only thing that they are good for is if you are starting out or rebuilding. From what I have read, they typically do not grow with you and are a sub-prime bank.

Good luck on whatever you decide to do.
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Postby christiea » Sun Dec 16, 2012 11:12 pm

Snowman touched on a lot of great points. Keep track of your credit score and monitor your progress as you try and raise it. There are tons of great free services out there that you can use. Credit Sesame has a good reputation, and they also just started offering free credit monitoring, which is a big plus.

Here are some good cards to start out with.

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