Information from the Washington State Department of Financial Institutions

The Basics of How Credit Cards Work

Credit Cards 101

Credit cards allow you to borrow up to a maximum credit limit set by the credit card company.

You are charged interest on all transactions if you don’t pay your full balance each month.

If you don’t pay off the balance of the credit card at the end of the month, you must make the minimum payment set by the credit card company. If you fail to make the minimum payment you may be charged a fee.

Interest and the APR

The annual percentage rate (APR) is the interest rate you’ll be charged if you carry over a balance from month to month. There may be several kinds of interest rates.

  • Introductory Rate - The APR that the issuer will charge new cardholders on balances for a specific time period. It can be as low as zero percent. Be sure to read all the terms regarding the introductory rate.
  • Penalty APR – If you fail to make a minimum monthly payment for more than 60 days your credit card company may charge you a penalty APR.
  • Cash Advance Interest Rate – The APR if you take out a cash advance against the credit card.

Grace Periods

The grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have “25 days from the statement date, provided you paid your previous balance in full by the due date.” The statement date is given on the bill.

Other credit card companies may note the due date on the statement. Keep in mind that the date is the day the payment must be received. If you sent it in the mail on the due date or even paid it with your online bill payment service, it will most likely be late.

The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away.

If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases. Instead, you may be charged interest as soon as you make a purchase (in addition to being charged interest on the earlier balance you have not paid off). Look on the credit card application for information about the “method of computing the balance for purchases” to see if new purchases are included or excluded.

Fees

Some credit cards charge annual fees for using the card, a cash advance fee (typically, $5 minimum or 3%), a fee when you transfer a balance from another credit card ($5 minimum or 3%), late payment fee ($35), over-the-credit-limit fee ($30), credit-limit-increase fee, set-up fee (for new account), a fee if your payment check is returned ($25), and other fees for services (telephone payment, reporting to credit bureaus, reviewing your account, etc.)

Cash Advances

Some credit cards let you borrow cash in addition to making purchases on credit. If you plan to use your card for cash advances, look for information about use of ATMs, because there may be charges for using other banks’ ATMs and different APRs for cash advances.

Credit Limit

The credit limit is the maximum total amount--for purchases, cash advances, balance transfers, fees, and finance charges--you may charge on your credit card. If you go over this limit, you may have to pay an “over-the-credit-limit fee.”

Features and Rewards

Many cards offer rewards, points, or rebates. Evaluate these features in terms of the extra credit costs to you.

What Happens If I Don’t Make the Minimum Payment?

If you fail to make a minimum payment, you may be charged a late fee and may also have your interest rates raised to the penalty APR for all new purchases. One missed or late minimum payment also could mean that you lose your introductory APR and have to start paying the higher long term rate on your existing balance.

What If I Have A Complaint Against A Credit Card Company?

If you have a complaint against a credit card company file it with the Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau offers a one-stop place for credit card holders to resolve complaints they may have with a credit card issuer.