How do credit cards work?
Quick Answer
A credit card lets you borrow money from a bank to pay for purchases, which you repay later, with interest if you do not pay the full balance on time.
The Full Story
When you use a credit card, the issuing bank pays the merchant on your behalf, and the amount is added to your balance. Payment networks such as Visa and Mastercard carry the transaction between banks, and the merchant pays a fee, typically around 1.5 to 3.5 percent of the sale. Each month you receive a statement; if you pay the full balance by the due date, you usually pay no interest thanks to a grace period, which in the US must be at least 21 days. If you carry a balance, interest is charged, often at annual rates above 20 percent. The first digit of a card number shows its network: 4 for Visa, 5 for Mastercard and 3 for American Express.
Key Facts
YouTube Angle
Suggested video title for this topic:
"How Do Credit Cards Work — Interest, Fees and Grace Periods Explained"