It can take years of using credit cards to understand just how they work. Even after you understand the basic credit card features, you might not know how they affect you. Read on for an explanation of the credit card process from start to finish.
Credit Limits and Available Credit
Your credit card has a credit limit. You can charge up to your credit limit without receiving any penalty. If you charge more than your credit limit, you will be assessed an over the limit fee each month your balance is over the credit limit.
As your balance increases, your available credit decreases. If you have a credit limit of $300 and make a $100 purchase, your balance is now $100 and your available credit is $300 - $100 = $200.
Billing Cycles and Billing Statements
At the end of each billing cycle, a billing statement will be mailed to you.
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Billing cycles typically range from 29 days to 31 days, but can be shorter or longer depending on your credit card.
Your statement will include the balance at the beginning of the billing cycle (what was carried over from the previous month). It will detail credit card charges and payments as well as credits and fees in the current billing cycle. The balance from your previous billing cycle is added to charges and payments from the current billing cycle for a current balance.
Finance Charges and Grace Periods
If you carry a balance from the previous month, a finance charge will be applied. The finance charge is calculated using the annual percentage rate. Your finance charge is calculated using one of several methods: average daily balance, double billing cycle, previous month's balance, or adjusted daily balance.
If you did not carry a balance from the previous month, you have a grace period to pay your balance in full without receiving a finance charge. Your next billing statement will include a finance charge, if you don't pay your balance in full.
Minimum Payments and Late Fees
You must make the minimum payment listed on your billing statement before the payment due date to be considered current. Current means you are not late on any credit card payments.
Typically ,the minimum payment is calculated as a percentage of your credit card balance. If you make less than the minimum payment or you make the payment after the due date, your payment is considered late and you will be charged a late fee. When you are more than 30 days late, the late payment is placed on your credit report.
When you make a payment on your credit card, the amount of the payment is subtracted from the balance. Your balance decreases and your available credit increases. So, if your balance is $200, your credit limit is $300, and you make a $50 payment, your balance goes down to $150 and your available credit is now $150.
The Credit Card Process Ongoing
Keep in mind much of this process applies to revolving credit cards rather than charge cards.
As you make charges and payments with your credit card, your balance and available credit will go up and down. Pay attention to your billing statement for minimum payment and date due. To keep good credit you should make at least the minimum payment each month and stay well below your credit limit.
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there are people out there (myself included!) that have hard credit cards for years, but still don't understand the way credit card processing works. it's good to make sure that whatever credit card it is that you sign up for, that you can get online account access. it's easier and more convenient to catch and stop fraudulent activity if you are regularly able to check your balance instead of only once a month when the bill comes.
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