How Do Credit Cards Work?

Credit cards are no more a luxury, they are almost a necessity. You can’t rent a car without one, you can't purchase goods over the Internet without one; you can't make airline reservations without one. Nearly everyone in modern societies have at least one credit card.

Now, however, the credit card industry and credit card holders are posed with a big problem called "Credit Card Debt." In order to understand what ‘credit card debt’ actually means, we need to understand the how credit cards actually work-- away from the point of sale.

Credit cards, as the name suggests, are cards on which you can get credit i.e. it allows you to borrow money in order to make a purchase. Your credit card is a representative of the credit account that you hold with the credit card supplier. Whatever payments you make to others using your credit cards actually represent your borrowing against that line of credit extended to you by the bank. Those charges create your credit card debt.

Your total credit card debt is the total amount you owe the credit card supplier. You must settle your credit card debt on a monthly basis. So, you receive a monthly statement which shows your total credit card debt for that card. You must pay off your credit card debt by the payment due date failing which you will incur a late fee and interest charges.

You have the option of making a partial (minimum) payment too, in which case you don’t incur a late fee but interest charges are added which increase your credit card debt. So your credit card debt keeps on increasing because the interest rates on credit card debt are generally higher than the interest rates on other kinds of loans.

Furthermore, the interest charges added on to your credit card debt each month form the new balance or the new credit card debt amount, and interest is charged on the previous month's interest. If you continue making partial payments (or no payments) the interest charges (and late fees) are calculated afresh on the new credit card debt. So you end up paying interest on the last month’s interest too.

Thus your credit card debt accumulates rapidly and soon you find that what was once a relatively small credit card debt has ballooned into a big amount which you find almost impossible to pay. Moreover, if you don’t control your spending habits, your credit card debt rises even faster. This is how the vicious circle of credit card debt works.

By: Don Burnham

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Don Burnham is an entrepreneur, author, real estate investor, teacher and speaker. He is CEO of the International Association of Seminar Professionals (IASP) and CEO and co-founder of the Wealth Restoration Institute, LLC, at www.weknowthewayback.com