How Do Credit Cards Work?

Credit cards were created out of a situation that many have previously encountered. Frank McNamara was out taking a couple colleagues out for dinner in 1949 and, when he went to pay, to his dismay found that he had no cash in his wallet.

After an embarrassing display that involved calling his wife to deliver funds to him, he came up with the idea for an encompassing payment card that did not require carrying credit at multiple locations.

The last six decades have seen an evolution in credit cards from a diner’s club to an all location payment choice for consumers, businesses and even governments.

Calculating Minimum Payments and Total Time to Pay Off Debt

Determining one’s interest rates is as simple as logging onto their bank account online or making a brief call to the bank.

Once in contact with the bank, there are two different percentages that the customer should ask or look for, the Annual Percentage Rate (APR) or interest rate and the minimum payment rate.

With the minimum payment and interest rates, figuring the minimum payment should be easy at any given time. The formula for finding one’s minimum payment is

[Balance] x [Minimum payment rate] = [Minimum payment]

Another important formula is used to determine how much of one’s minimum payment is being applied to his or her credit card’s interest.

Figuring this formula out with the values associated with one’s credit card is usually a revelation that pushes consumers to attempting to pay off larger portions of the balance on their credit card each month rather than only the minimum due. This formula is

[Annual Percentage Rate] / [12, the months in a year] x [Total balance] = [Amount going to principal]

For example, if someone owed $3850 on a card with an APR of 13% and minimum payment rate of 2%, we can easily figure his or her minimum payment, how much the minimum payments are going to interest, and how long it would take to pay the credit all the way off.

  • Minimum Payment: $3850 x .02 = $77.00
  • Amount going to interest: .13 / 12 x $3850 = $41.71
  • Finding the amount going to the principal is as easy as subtracting the amount going to interest from the minimum payment. In this scenario, the principal is only subtracting by $35.29, which is not even half of the minimum payment. Due to this, it is highly advisable that people who have credit cards pay off more than just their minimum payments, thereby reducing the interest they pay over the life of their credit.

How to Apply for a Credit Card

Applying for a credit card is slightly different for each credit company, but there is a process applicable to each card that is fairly straightforward.

  1. Fill out the application, including full name, address, social security number, telephone number and email address, then submit the application via mail, email or online through a reputable website.
  2. Wait to hear back from the credit company with their offer for the credit line and APR, sometimes this process is instantaneous when applying online.
  3. Accept the offer and the card will arrive in the mail, usually in 5-10 business days.

Having a credit card is a major responsibility so spending wisely is advised, as is monitoring one’s spending habits and balance.

For first time credit card holders, spending money can seem easy so it might be best for them to consider their credit card as an emergency payment option until credit management just becomes a part of his or her routine.

How Do Credit Cards Work

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