How Do Credit Cards Work – Your Basic Guide

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“In childhood, a library card takes you to exotic faraway places; in adulthood the credit card does”
— Evan Esar

You’ve heard about so many people who use credit cards for various purposes including for weddings, education, and travel. More than 19 million Canadians took personal loans or use credit cards in 2019. And almost 8% of them borrowed money to go on the trip. But the most popular reason is to buy a car, the next one is to pay for a mortgage and the third one is taking a loan for debt consolidation.

It’s no surprise because it is a popular form of a loan taken for a short time frame. A provider of these cards gives the money for the consumer that may be used to cover any expenses. It differs from a debit card as in this case the funds are typically used from the checking account of the client. So, how do credit cards work? Here is a closer look at what is a credit card and why you might also want to obtain one.

How Credit Cards Work

Why don’t we start from the very beginning and define what this lending solution means? This is a short-term solution for various needs and expenses that ought to be covered urgently. How does a credit card work? Different from many other lending options, this solution gives a consumer an opportunity to use the card issuer’s money. Provided that a borrower pays the balance regularly and in full, they won’t need to pay the interest.

The interest rates can vary, so clients have the chance to select the most suitable one. Borrowers can also calculate credit card interest themselves with the help of online calculators before they opt for a certain card. More than that, this option has many benefits that we will cover a bit later and this solution is meant to help to repair the credit score over time as the credit reporting bureaus will be notified about the card activity.

Luckily, there are positive changes in the way modern adults view lending solutions when they are short of cash. Last year there were over 75 million credit cards in Canada. The people of various ages were asked what they think about the way they use them and what features they search for. The results were better than the previous year and demonstrated that consumers tend to shop around and look for better and cheaper offers. This is a positive tendency, as adults should learn to be more serious with their funds in a time of economic downturn.

average credit card interest rate
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How Does Credit Card Interest Work?

One of the most essential questions, before a person decides to select this lending solution, is to understand thoroughly how is credit card interest calculated. This is particularly the amount of cash that is necessary to pay if a consumer doesn’t repay the full balance until the due date. Later on, a person will need to keep on paying the charges so that the balance is fully repaid.

So, experts recommend taking into consideration this feature and know exactly how credit card interest works so that you avoid problems. One of the biggest problems is having a bad credit score. In case you want to prevent this, be a responsible borrower and always repay the credit balance in full so that the credit history repairs.

Regulated by the finance-related institution where you receive a card, it may come with variable interest rates. For instance, there is no average interest rate. There may be 22% on cash-like transactions, but 19% on ordinary purchases or cash advance. Retail cards might also come with a higher interest, so you ought to be careful and thoroughly review the terms and details before signing any papers.

What Does a Grace Period Mean?

Every card has a so-called grace period that is completely free of charge. This term starts when you may the first purchase using this lending option. The credit statement can tell you more about the billing term, the free period or how to calculate credit card interest. Typically, local banks and other traditional lending institutions provide a 21-day interest-free grace period.

Often people are talking about the downsides of this lending option as it might come with higher extra charges and costs. How does interest work on a credit card? If we use the common 14% APR rate, making just basic minimum payments can lead to a growing credit card debt that will be even harder to get rid of.

how credit cards work
Source: Pexels.com

Do You Need This Lending Solution?

Provided that a consumer is aware of all the details of this lending solution and know how to calculate interest on a credit card, it may become a wonderful and useful tool in your pocket. There are plenty of advantages of using such a solution. For instance, it is aimed at helping people build and repair the credit score. If one’s credit history isn’t great, this may be your chance to boost it as all activity on the card will be monitored and reported to the major credit bureaus.

Secondly, these cards are the best form of interest-free loans for the short term in case the borrower pays the balance as a whole until the due date. More than that, consumers may get various travel benefits, extra perks, shopping rewards, etc. There is a huge variety of credit options on the market these days. You may select the one that will best meet your current needs and use it to your advantage. Pay attention to the way how is interest calculated on credit card do that you avoid more debt. Finally, the last advantage is that using a card you have more chances of avoiding fraud and scammers as you don’t use your own cash but the funds come from the issuer of the card.


Use these tips and easy guide and learn the basics of this lending solution and how do interest rates work on credit cards. Bear in mind that every consumer should use any card responsibly and don’t forget to repay the whole debt each month.

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