How do credit cards work?

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    Jordan Moore
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    #32520
    Jordan Moore
    Keymaster

    A credit card is basically a formal “I owe you” agreement with a bank or financial institution. 

    When you use the credit card to buy something you’re essentially saying, “I don’t have the money for this right now, but I promise to pay you back later.” The bank spots you the money and you have a set period of time (usually about a month) to pay it back. If you don’t pay on time whatever you owe starts to build interest. 

    For example, if you paid $100 for a jacket and pay it back on time you just pay the hundred bucks. But if you choose not to pay it right away you’ll have to put down a minimum payment and carry the balance into the next month. The catch is that you’ll owe interest on that balance you’re holding, so what once was a $100 jacket now ends up costing you $102 (depending on your interest rate) when you pay it a month later. 

    That may not seem like a lot at first but can start to accumulate based on how much you spend and how long it takes you to pay off your card. So, you want to pay your card in full as often as possible. Only paying the minimum balance each month can lead you down a slippery slope of piling interest charges.

    Also, how responsibly you use your card affects your credit score (and you want to keep that number high if you want to borrow money in the future like for a car or house).

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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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