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Financial Literacy

Financial Literacy

Home Finance Credit and Debit How Credit Cards Work

How Credit Cards Work

How do credit cards work?

It's pretty simple, actually.

You find something you like in a store, you whip out the plastic from your wallet, and you hand it over (or in some cases, swipe it yourself). The information from your card is sent electronically between your credit card company and the store. The purchase is paid for, and at the end of the month you get a bill for what you owe.

The end.

If you're buying online, you obviously can't swipe; instead, you give the company your name, credit card number, the card's expiration date, and the special security code on the back. With all that stuff—the same stuff that a company gets by swiping your card, by the way—the company has enough information to charge your card. American Express, Visa, or whoever issued your card sends the money to the company and then sends you a bill at the end of the month for whatever you owe.

It's all based on the principle of "buy now, pay later." It can be a beautiful thing, especially if you really want some buffalo chicken mac and cheese now but can't afford it till payday. Or if you run out of gas in the middle of a dark forest with no cash and only a Bates Motel and gas station nearby. Buy now, get the heck out of Dodge, and pay later.

If you don't pay, that's when you're charged interest (i.e., a percentage of the amount you owe). So, word to the wise: pay.

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