The Credit Guy

How does a credit card work?

Ask The Credit Guy 
The Credit Guy, Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers’ questions about credit, counseling and debt issues.

Question for the expert

Dear Credit Guy,
How does a credit card work? Do I have to pay my credit card bill all at once or can I pay it over time? I want to get a credit card so I need to know.

Answer for the expert

Dear Laurence,
Figuring out how a credit card works and how it best fits your needs is smart. Generally speaking, credit cards can be paid in full or you can carry a balance depending on the credit offer you choose to accept and your credit history. A few card products allow the convenience of charging purchases, but require that the balance be paid in full each month.

From your question, I’m guessing you haven’t dealt with credit cards before. So I assume you’re a credit card rookie, and you need basic information. Happy to help! Here it is:

  • Most cards require only that a minimum percent of the total balance be paid each month, but paying only the minimum balance will be costly in the long run.
  • You will be charged interest on the remaining balance for the privilege of paying less than the full balance due.
  • Interest charged vary greatly, depending on your credit history and the type of credit card you obtain.
  • Comparison shop for a credit card, because they have many different features and rates. If you have good credit, try for one with a low interest rate.
  • If you don’t know whether you have good credit, find out: By law, you’re entitled to a free credit report each year.

As The Credit Guy, I want to give you some tips on how to best to manage your credit card account once you choose the right offer for your circumstances. Since your question regards paying a balance over time, I am guessing that you plan to use a credit card to buy something and then pay the loan back over time.

Payoff plan
I encourage you to have a plan in place to pay off the balance on your card in 90 days or less. If you will not be able to pay the balance in 90 days or less, I suggest you put off buying until you have saved enough money to pay off the balance within that time.

The reason I encourage you to have a plan in place and limit the repayment period to three months or less is because life happens. You may need to use your credit card for some other purchase that comes up unexpectedly and, before you know it your credit card balance can balloon out of control.

Most people who speak with our credit counselors did not obtain credit cards with the intention of becoming tens of thousands of dollars in debt. It happens over time because credit card use was not included in a spending plan nor was money budgeted to pay the balances in a reasonable period of time.

Using your credit card account as a financial tool and as part of a well-thought-out, practical spending plan makes sense. Using your credit card account without a plan for its use and without a repayment plan is asking for future trouble.

In addition, be aware that using a credit card to extend your income, even briefly, can create a debt that will take years to pay back. 

I hope you find the right credit card for you, and that you take the time to save money and plan your purchases to avoid credit card debt problems.

Take care of your credit!

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a reader each week.
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