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Credit card


Credit card is a card that allows the owner of the card to borrow money from the card issuer to make purchases on credit. Let say, Mr. Jack has a credit card with $1000 credit line from xyz bank. He also owns a checking account in xyz company and has $600 in his account. To make it more interesting lets say Mr. jack will receive his next salary of $800 pay check in ten days from now.


* If Mr. Jack made a purchase of $450 with his credit card, then he will have $550 balance available to make additional purchase on credit. Until his credit due date nothing changes on his checking account, he still has $600 balance, because he is financing his purchases on credit. That means he owes $450 to xyz bank. After the due date if Mr. Jack pays his creditor the full outstanding balance of $450 from his checking account, then his checking account balance will drop to $150 ($600 - $450) and his available credit will go up to his credit limit $1000 (He owes nothing to the bank).
* what if Mr. Jack wants to make a $620 purchase today? Although all he got is $600 in his checking account, he can make the purchase with his credit card and pay it later. Because most credit cards come with a 20+ (twenty plus) grace period for repayment of credit purchase balances, before his credit balance due date his salary will arrive. In this scenario Mr. Jack will not have any trouble of paying his credit. Note that without credit card , Mr. Jack couldn’t afford making the $620 purchase at the time he needed.



*What if Mr. Jack wants to make a $1600 Purchase today? Well he can make a purchase of up to $1600 ($1000 with his credit card and $600 with his checking account) today, but can he afford repaying his credit card outstanding balance let say after the 25 days grace period? No. So when the due date arrives he can only repay up to $800 (his salary) towards his $1000 used credit. The balance $200 ($1000 - $800) will be carried forward and Mr. Jack hast to pay fees , penalties and so forth for late payment on top of the $200 unpaid credit.
Purchase made with his checking account is similar to cash purchases and there is no credit attached to it. In other words $600 on his checking account is his own money and he doesn’t need to repay it. Only credit card purchases need repayment.
APR stands for Annual percentage rate. APR is the annual cost of a loan expressed as a percentage.
GRACE PERIOD is defined as the time frame that the credit company allows the credit card holder to pay his loan with out penalty.
ANNUAL FEE a yearly fee charged by credit card company for use of their credit card. Note that not all credit card companies charge annual fee.