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How Does a Credit Card Work? Careful with this

Knowing the handling and knowing how a credit card works is something that, most likely, we will end up knowing at some point in life.

Although some people never fully master them and tend to make various mistakes in their financial life, others, according to practice and despite not having an instruction manual, become experts in their use.

Therefore, here we will tell you everything you need to know about one of the most popular payment tools, not only in Mexico, but in the world.

What are its origins?

According to historians, its origin dates back to the beginning of the 20th century in Western Europe , especially in France, England and Germany, although with a very limited application, having subsequently spread and gained popularity in the United States in the 1960s.

The emergence of the credit card is linked to the development of commercial activities , the rise of the consumer society and mass contracting; also, as a means to avoid the mobilization of cash, and to simplify the activities of consumers.

It arises as an instrument whose presentation allows to defer payment obligations in certain transactions. The exhibition of the card will credit its holder to dispose of goods or services without immediate delivery of cash.

How does a credit card work?

A credit card works by combining revolving credit (credit that can be used repeatedly) and a plastic that serves as a means of accessing funds. Plastic is  used in businesses that accept this type of payment , to buy goods or services, without disbursing cash.

Simply show the credit card at the checkout to slide it through a sales terminal and enter your electronic signature or sign a promissory note (also known as a voucher), for the amount of the purchase.

The issuing institution of the plastic, subsequently, will settle the purchase amount to the merchant in the name of its client (after discounting a percentage of the purchase). Subsequently, the amount owed by the cardholder must be paid to the financial institution, which can offer different deferred payment schemes with and without interest for financing.

The establishments that accept credit cards are affiliated with one or more of the transaction processing networks that operate in the world, such as: Visa, MasterCard and American Express.

The largest network is that operated by Visa  and the cards issued by its affiliated banks are accepted in more than 30 million establishments in more than 200 countries and territories in the world. The networks are responsible for processing transactions and guaranteeing the operation of credit cards globally.

The difference between a credit card and a debit card

The main difference between a credit card and a debit card is that the first is a credit granted by a bank and a plastic that is used to access the funds that the institution lends you.

Meanwhile, a debit account is for deposit and the funds you use are those that are available in your account and you can do so until they are exhausted.

Now that you know what a credit card is for, tell us what you think, and if it is your first plastic, which one you have or which one you would like to hire. 

How do I pay and buy with my credit card?

Each month the issuing bank of the credit card sends a Statement of Account that summarizes the purchases, cash withdrawals , commissions and payments made on credit from the initial cut-off date to the final cut-off date.

Likewise, the deadline for making the payment is indicated , the minimum amount to be settled on the payment date and the amount to be paid to avoid paying interest, among other informative data. Here is an example of an account statement:

So that there is no confusion, here we show you the concepts that you can find in your Account Statement , so that you know how a credit card works and be very careful when interpreting them:

  • Minimum payment: It is determined by taking a fixed percentage of the balance owed as of the cut-off date. The minimum payment fluctuates between 5% and 10% of the balance owed and is the minimum amount that you will have to cover so that your credit remains current. However, it is good practice to pay off either the total debt or an amount greater than the minimum payment to prevent the debt from increasing considerably with the collection of financing interest.
  • Cut-off Date: Day of the month that the bank takes to calculate your debt , minimum payment and interest, which appear on your Account Statement. For example, if the cut-off date is the 30th of each month, the Account Statement will show all the consumptions that you have made with the card from the 1st to the 30th of the current month, the balances will be added to those consumptions above and the minimum payment and interest to be paid willbe calculated.
  • Credit Limit: It is the maximum credit limit granted by the bank and that you can use on your Credit Card. It is determined by your income and your ability to pay (income minus your obligations) and is assigned when the card is contracted. The bank may make adjustments to the line according to user behavior.
  • Balance at Court: It is the amount owed updated as of the court date (when the account statement is issued). Any subsequent transaction will be included in the next account statement. It is the result of adding your previous balance, your purchases made during the month and subtracting the payments made in the period.
  • Payment not to generate interest: It is the amount you have to pay to avoid financing charges , if you do not have a previous balance, it will coincide with the total purchases made during the month. When you settle this amount, you will have used the financing of the card from the previous cut-off date to the current cut-off date without paying interest.

What is a negative balance?

The negative balance or overdraft of a credit card is when the cardholder has exceeded the credit limit granted by the bank , that is, he has had more funds than the bank allowed.

To know how a credit card works in this case, you should know that a commission may be generated for having “passed” the credit line, so you must be careful not to end up overpaying.

What are the fees on a credit card?

  • Interest (financing charges) : Financial institutions charge financing interest when the balance is not fully settled at the cutoff . To do this, the bank calculates the average daily balance owed and multiplies it by the interest rate stipulated in the credit card contract. Credit rates in Mexico are generally stipulated based on the Interbank Equilibrium Interest Rate (TIIE) , published by Banco de México on the date of calculation. Banks will be able to charge higher rates to customers who demonstrate erratic payment behavior and who may be more risky.
  • CAT: Total Annual Cost , are all the costs that are implicit in the use of the card represented in a percentage that serves to compare how expensive a card is with respect to its competition. In its calculation, the interest rate, the annual fee and any commission charged by the bank for the use of the credit are used.
  • Annuity – A charge that is paid to use the card once a year. There are some banks that offer their products without charging it.
  • Cash provision: is the bank commission charged for making a cash withdrawal with your credit card at ATMs, bank windows or any other means.
  • Late payment: this is an amount set by the bank and applies when you pay after the deadline. To this amount is added the interest generated payable after the date.
  • Additional cards : some cards have the ability to extend credit to family members, however; When you request them, you will be charged a one-time commission.
  • Replacement of plastic: this commission will be charged in case you suffer an assault and consequently lose your card or in cases where your plastic is very damaged and you need another one.
  • Improper clarification: it occurs when you request a clarification for unrecognized charges and it enters a dispute, in some banks, when there is no charge.
  • Additional rewards: banking institutions offer extra benefits with their plastics by paying an amount on a monthly or annual basis.

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