Credit Cards

AJ Credit Repair will teach you how to handle credit cards.

Here are a few answers and solutions to the most common questions.

How do credit cards work from a consumer point of view?

From a consumer point of view, credit cards are simply cards made out of plastic that permit you to access a credit card issuer’s credit limit that the bank has provided to you. This credit line works something like a loan, the main difference is the creditor does not deliver you the entire cash amount up front, instead the bank permits you to draw the credit amount that you wish to when you need it, on demand. They also let you use the loan again and again so as long as you repay the amount that you borrowed. This is why credit cards are often referred to as revolving accounts. Every time you buy something with your credit card your available credit line decreases by this corresponding amount. Consider an example, if you have a $200 credit limit and you buy something for $50, then you will have $150 remaining in available credit. You then owe your creditor the bank $50 you may charge something else for $50 before your monthly statement arrives. In this case you would owe the bank $100 and still have another $100 available in remaining available credit. What separates these credit cards from traditional loans is that will again will have access to your credit limit each time you pay the balance down on this card. In the previous example, if you repaid the $100 total balance you charged you would then have $200 of available credit to use again. It means that you can continuously spend as much as your available credit limit and pay off the balance as often as you wish as long as you obey the credit cards terms. These terms normally involve paying your payments on time every month and not going over your credit line limit with your purchases. As you are allowed to keep borrowing against this credit line indefinitely, creditors usually call these cards open ended accounts or revolving accounts.

How do credit cards work from a business point of view?

There is much that happens with credit cards beyond your consumer perspective. This behind the scenes activity explains why banks offer you a credit card in the first place. When you give your credit card to the merchants to pay for your purchase, the credit card terminal of the merchant communicates with your card issuer electronically. It asks the creditor if your card is valid for you to use and whether or not you have sufficient available credit. Your issuer of the credit card instantly reviews the charge before sending back a reply that this transaction has either been approved or alternatively declined. Why does the credit card issuer provide you with this convenience?  Because the creditor receives several percent typically 1-3% of the charged amount from the merchant in fees, and they also hope to make money off of your charges from you. The creditor is providing you with a preset time limit to repay the entire amount you have borrowed from them usually a little less than a month. If you do not do this by the cutoff date aka payment due date, then they will charge you interest. This amount of time before they assess interest charges is known as the grace period and it typically lasts from 20-25 days. Should you choose not to pay down your entire balance by the time this grace period ends, then they assess a finance charge and add this on to your remaining balance. Your finance charge will be based upon the interest rate on your particular credit card multiplied by your outstanding balance this interest rate amounts to the yearly rate that you to borrow money using your credit card. The creditors typically base these rates on the prevailing market interest rate the kind of credit card you possess and your credit history. For those of you who have a good credit history of repaying credit card bills, you will secure a much better and lower interest rate then the usually charged amount.  Similarly, if your credit card history is less ideal than you will generally pay a higher interest rate than the typical interest rate amount. Businesses give you the chance give you a chance to pay off your entire balance before the grace periods ends so you can avoid paying any interest. In reality however, they would prefer that you would not pay it all off at one time so they can make money off of you.