How credit cards work
When you sign up for a credit card, you are signing a contract with the card company. You agree to the terms of the contract. The company puts a “credit limit” on your card of how much you can borrow.
You make purchases with the card and the card company pays for the items. Each month, they send you a bill listing all of your purchases with the card. The bill has a due date and a “minimum payment” amount. You can:
- pay the bill in full by the due date and not pay anything extra if you started the month with a zero balance.
- pay just part of the bill and owe the card company the balance and interest on the part you did not pay.
- if you do not make at least the minimum payment by the due date, they will charge you a late fee and maybe increase your interest rate.
- if you go over your credit limit, there will also be fees
- if you keep charging without paying off the balance, the interest you owe will keep adding up
Our tips for using credit cards:
- have just one or a few credit cards
- pay your bill on time
- pay as much of the balance as you can to keep interest down
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