Credit is Necessary in the Modern World, But How Does It Work?

Credit Cards and how they work:

I have a limit on my credit card of $10,000, now what?

One of my first questions when I received my first credit card was, “now what?”

Credit is money you borrow from someone now and you pay them back later. When you finance a car, you borrow money from the bank and make payments back to the bank. When you get a mortgage on a house, you borrow money from the bank and pay them back monthly. When you get a credit card you make daily purchases you will pay back the credit card company monthly.

The biggest lesson I learned with a credit card was that you buy something now and pay it back later.

To answer my initial question of, “now what?” – Once the credit card is issued you then have access to your online account. A checking or savings account is needed to connect to your online credit card account. Here is how it works:

Purchase something with the credit card (ie. Gas, groceries, dinner, etc.)

The credit card company keeps track of how much you spend and will send you a ‘credit statement’ each month. This tells you how much you spent and how much is due. The nice, and dangerous, thing about credit cards is that you can make a large purchase and then pay it back in smaller portions with your checking or savings account.

Ideally, you would pay for gas and groceries for a month and then the next month when the credit card company asks for a payment you would pay them back in full. If you don’t, you would only pay a portion of what you spent last month. However, this could add interest to your next payment. Since you borrowed money from the credit card company they were nice enough to let you borrow it but the longer it takes you to pay it back, the more you will have to pay, in the long run.

**Pay off your credit card each month.

Credit is a great tool is today’s world but it can easily become your worst enemy. Apply for credit wisely.

**: bottom line AKA the point