How Do Credit Cards Work? Understanding Credit Card Payments and Fees

How Do Credit Cards Work? Understanding Credit Card Payments and Fees
Point Editorial

Credit cards are all but a mandatory financial tool these days, especially with the high degree of digitization that defines the modern world. Nearly everyone has a credit card, if not several. 

Credit cards are convenient to have on hand for making purchases, and you can acquire one by applying through your banking institution or by going directly through a credit card company. Despite their simplicity, they come with responsibility, and one of the biggest cardholder obligations is making monthly payments. 

Read on to learn more about the importance of credit cards, understanding the types of payments associated with having one, and what happens if you miss those payments.

Why are credit cards important? 

Credit cards are financial instruments that allow you to borrow up to a certain amount of money from a credit company to make purchases. When your billing cycle begins, you are required to pay that amount back. Known as a revolving line of credit, you can continue to borrow money and pay it off on a continual, regular basis.

Not only do credit cards make purchases quick and simple, but they also help build up your credit score. Your credit score is a three-digit numerical representation of your financial health. Having a good credit score will open many doors for you down the road, such as help you in applying for a mortgage, a student loan, or a new line of credit

Practicing responsible habits regarding your credit card payments is essential to growing your wealth and having access to more opportunities all around. 

What is a credit card balance? 

Your credit card balance is the sum of all your purchases made with the card. Every time you buy something new, that amount appears on your balance. Interest and any extra costs are included in your balance, too, such as late payment fees, transaction fees, or annual membership fees.  

Any remaining balance that you do not pay off is carried over to the next month and will earn interest. 

What is the minimum payment?

As a cardholder, you must make minimum payments on any outstanding balances each month. That money goes toward your total credit card balance. Your card issuer will tell you how much you owe when the monthly billing period ends and what the minimum required payment is.

Minimum payment amounts differ between credit cards. A standard method to calculate such a value is below. 

Interest + 1% of total credit card balance = minimum payment

While just making the minimum payments will not affect your credit score, it is always better to pay off as much of your balance as you can. Lower payments mean more of your balance will carry over to your next billing cycle, and therefore you'll have more interest to pay as well. 

It's important never to borrow more than you can pay off, as letting payments get out of hand will be detrimental to your score. That said, experts recommend that you use no more than 30 percent of your allowed credit limit. Exceeding this can also limit your ability to obtain loan approval in the future, and having credit in reserve is always wise, too. 

What is the grace period and how do I keep it?

The grace period is the time when you can make purchases and pay off your card without fees.

The average grace period lasts 21 days from the day you receive your bill. So long as you pay off your balance completely, you won’t have to pay more interest. Doing this each month allows you to keep the grace period.  

Credit card grace periods do not apply to cash advances, as they earn interest immediately. 

5 types of credit card fees 

Typically, most credit cards will come with some sort of fee. The following four types of costs are some of the most common, but keep in mind, they do not apply to every card. 

One: Late fees. You must pay a penalty each time you miss the due date for your minimum monthly payment. The penalty will increase the more you neglect this task, and your credit history will reflect such behavior. 

Two: Over-limit fees. This fee is a consequence of going over your credit limit. The cost can be between $25–$35. It depends on how much you go over. 

Three: Annual fees. This refers to how much it costs to keep using your credit card each year. The majority of cards do not come with annual fees.

Four: Cash-advance fees. A cash advance is a short-term loan from a bank or another lender. Some credit companies permit users to take out cash advances, but it can be pretty expensive to do so. The fee amount is computed based on how much you take out. Once again, the moment you take out a cash advance, interest starts to accumulate. Cash advances overall are costly, so it is best never to take one out unless absolutely necessary.  

Five: Returned-payment fees. You will have to pay a fine if your bank is unable to process credit transactions due to insufficient funds, account closures, or account freezes. 

What happens if I pay my bill late?

The consequences of paying your bill late can be long-lasting, especially if this behavior persists. The severity of such penalties depends on how long it takes for you to make your payment.

If your bill is less than 30 days overdue, you’ll receive a fine of up to $35. Your APR or annual percentage rate, a value that refers to how much interest you pay on your card, can be raised as well. If it is, you have the right to be notified within 45 days. 

If your bill is 31 to 60 days overdue, banks group you with those individuals who haven’t paid their bills for more than 60 days. Your credit company will most likely report this behavior, and it will influence your score. 

If your bill is more than 60 days overdue, your interest payments will rise, and your credit score will suffer.

The bottom line

Credit cards can benefit you in multiple ways, but there are drawbacks and consequences, too. It is good to be aware of these before applying for your first credit card or a new card.

Also, it’s important to know that additional options exist alongside traditional credit cards for you to choose from, and some that have more advantages and flexibility than others. One such card is Point Card

Designed as an alternative to a traditional credit or debit card, Point is a transparent, easy-to-use payment card that promotes financial independence. It allows cardholders to maintain control of their spending by using their own money and rewarding them for doing so through unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.

Other benefits offered by Point Card include fraud protection with zero liability, car rental and phone insurance, deposit insurance, two free ATM withdrawals each month, and no interest fees. So, you can have peace of mind knowing that you won’t have to pay any unnecessary costs and can focus on bettering your financial situation and spending your hard-earned money on things that truly matter to you.

Point is an excellent tool for intelligently navigating your financial journey now and in the future.

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