How Does a Credit Card Work?

 in this video we're going to talk about  how credit cards work  and how we can use yours to earn rewards  build a strong credit history and get  access to better loans and credit cards  in the future  but 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 that 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 but before we go any further  let's talk about interest  when you spend money on a credit card  you'll 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 the 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 annual percentage rate or 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  enters a cruise each day you just divide  your apr by 365  and then multiply that by your balance  for example  if you have a balance of ten thousand  dollars and a 26 percent apr  you divide the 26 by 365  to get about 0.071 percent  that's your daily interest rate multiply  this by your ten thousand dollar balance  and you can see that you'd accrue about  seven dollars and ten cents in interest  that day  leaving your new balance at ten thousand  seven dollars and ten cents  assuming you don't charge anymore to the  card but here's where it gets dangerous  the next day your credit card issuer  applies your daily interest to your new  balance  in this case ten thousand seven dollars  and 10 cents  so your balance now grows by seven  dollars and eleven cents that day  bringing your total to ten thousand  fourteen dollars and twenty one cents  the next day you pay the same interest  rate on this larger balance and suddenly  you owe ten thousand  twenty one dollars and thirty two cents  it's easy to see how it can quickly get  out of control  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 purchases and 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 balanced  transfer card or a personal loan  you can find loan and credit card  recommendations on the ascent's website  so if a credit card can be 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 might want to take out a loan  someday to pay for a house or a car  and 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 a 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 will remove the fraudulent  purchases from your bill and send you a  new card  this is a lot safer than using a debit  card to shop online  as that's tied directly to your bank  account if an identity thief gets that  number they could potentially drain your  savings  but most people's favorite reason for  using credit cards is the rewards  these vary depending on the type of card  you have  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 towards airline and hotel  purchases and sometimes other perks  like free travel vouchers bounce  transfer cards have zero percent  introductory apr periods  that are great for those who are trying  to pay off their existing credit card  debt  or finance the cost of a new purchase  with a zero percent introductory apr for  purchases  and then there are some rewards that are  less well advertised things like  purchase protection which will reimburse  you if something you bought with the  card  is damaged or stolen you can find a full  list of benefits for a given credit card  by reading through its cardholder  agreement if you want to get the most  out of your credit card  you should choose one with the rewards  you want that also matches 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  it will almost always cost you more to  carry a balance than you'll get from any  rewards benefits  so you should avoid overspending at all  costs  a credit card can be a great tool for  building your credit shopping safely  online  and getting rewarded for purchases you  are going to make anyway  but you have to use it responsibly or it  could end up making your life a bit more  difficult  keep these tips in mind when shopping  with a credit card to stay out of debt  and get the most out of your card