How Do Credit Card Payments Work?

Credit has been a topic of debate within the last decade, especially since the 2008 housing crisis. Thankfully, credit providers have taken more responsibility in ensuring that credit is provided for people that have the capacity to pay it back. Now that you have applied for credit, the most exciting is receiving it. But few people actually know what goes on behind the scenes with credit card bills.

So, let’s explore how credit card payments work.

Understanding your credit card bill

You’re at a furniture store, looking to buy a new set of chairs with your newly received credit card. The set of chairs cost $1000 and you happily swipe away for your first credit card purchase. The $1000 is now added to your credit card balance. The credit card balance is the amount owed by you to the credit provider. The credit card balance consists of a principal amount as well as the interest accrued.

The interest rate on the credit is usually decided before the credit card facility is issued. The balance may also include banking fees, late fees and any applicable charges. Once the balance is determined, it is then organized through a monthly billing cycle. A monthly billing cycle communicates the minimum amount of money that you are liable to pay and when that payment is due.

Once the payment is made, the remaining balance rolls over into the next month, along with the interest on the balance and any fees applicable. The smart play here is to pay that balance in full before your payment due date to avoid interest charges.

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Here are some other common fees to avoid:

Over-limit fees:

This is when you spend over your credit limit. The amount of the fee depends on the credit provider.

Late fees:

When you make your credit payment after the due date. The actual fee also varies among credit providers. However, this should be avoided at all costs as it has a direct impact on your credit history.

Decline Fee:

As the name alludes, this fee is charged when you attempt to make a purchase with a credit card that has insufficient funds.

Making the minimum monthly payments will ensure that you remain in good standing with your particular creditor. This is very important as it may affect your credit score. It’s important to note that you should always strive to pay more than the minimum payment, as you will avoid the balance compounding to the point that it becomes unaffordable.

Minimum payments are specifically calculated to maximize the amount of interest charges the card issuer can derive from you. Always pay more than the minimum, and if possible, pay the balance in full.

The good news is if the situation escalates in that manner, there are creditors that offer credit card debt forgiveness. You really don’t want to go there though.

Credit Card Payment Options

When it comes to actually paying off your credit, here are a few credit card payment options to consider:

1. Electronic Funds Transfer (EFT):

EFT payments is one of the most common transaction methods of the 21st century. In summary, it is the digital transfer of money from one location to another. You can pay off your credit card bill by simply creating an online banking profile with an existing bank. Once the profile is created, you can then create a payment link between your account and credit card bill. Once the link is created, you can then directly transfer money from your banking app directly to your credit card, therefore paying the bill. This is perhaps one of the most convenient credit card payment options.

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2. Cash Payment:

This may be considered, one of the most risky credit card payment options. This involves carrying physical cash and handing it over to your creditor. Being in possession of a large amount of physical cash leaves you vulnerable to theft and armed robbery. It may appeal to you because it the quickest credit card payment option. The payment usually reflects within the same day.

3. Check Payment:

Perhaps one of the most archaic credit card payment options, writing a check is still a valid payment option. You need to fill out your banking details and general information such as the date and payment amount. Once that is done, you mark the check as payee and you insert in the drop box for it to be processed within by 3 business days.

With this guide, understanding how credit card payments work is a simple process.

About the author: Cory Weinberg

"Student. Subtly charming organizer. Certified music advocate. Writer. Lifelong troublemaker. Twitter lover."

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