by Joseph Kenny | 09/23/09

Credit cards work according to some very simple concepts. Credit card companies are out to make money so many of these concepts are designed to make money. While credit cards allow you to spend money that you do not have, they are also geared toward getting you to pay more than just the money that you are, in essence, borrowing. Here are some of the underlying concepts.

The Grace Period

As stated earlier, when you are charging a purchase on your credit card, you are essentially borrowing money to make that purchase, money that you are to pay back by a predetermined date. Your due date may be several weeks after the original purchase and it is at this point that this amount begins to accrue interest. If you can pay off your credit card bill before the amount begins to accrue interest then you can avoid having to pay this added amount.

Your grace period is not set in stone. It can be changed by your credit card company. It is often adjusted as a result of missed payments. When the grace period is shortened for this or any reason, then the credit card company starts earning interest off the amount of money that you borrowed sooner and makes it harder for you to avoid this accrual of interest.

Interest

There has already been some mention of interest. Interest is just the money that you have to pay for the ability to borrow money and to use your credit card. Your interest rate applies to the total sum of money that is not paid off at the end of each billing period.

Your interest rate may initially be determined by special credit card offers or it may be determined by your personal credit rating. If you have good credit then it is likely that you will get a better, lower interest rate than someone who has poor credit.

Your interest rate may not remain static, however. It can change as a result of late payments. The reasoning behind this is that late payments make you seem like more of a risk to the credit card company so they charge more to help protect themselves from this risk.

Credit Card Fees

Credit card fees are issued for a number of reasons. Some credit cards charge annual fees just for the privilege of using that credit card. If you make late payments then you will be assessed a late fee. If you happen to charge more than your credit limit allows then you will be hit with a fee for going over your credit limit. Some credit card companies charge a fee whenever you use your card to get a cash advance. You may even face fees when you attempt to transfer your balance from one credit card to another.

These credit card fees, along with interest, are a large part of what makes credit cards into a business. The various fees that credit card companies can and do charge allow the companies to make a substantial profit off you as a cardholder. All these fees make for big business.

Credit cards work by using grace periods, interest, and fees. You use your credit card to borrow money and then you are supposed to pay that amount back. If you cannot pay the full amount then you can get trapped in interest charges and other fees which allow credit card companies to profit off you until you pay off your total balance.