Banking 101: Credit Card Basics

A credit card is a plastic or metal card that lets you pay for goods or services using the card issuer’s funds with the promise that you will repay the card issuer later. Each time you use a credit card to pay for a good or service, you enter into a legal agreement to borrow money from the card issuer for the purchase, and to pay it back, either in full or with regular monthly payments.

When you apply for and are approved for a credit card, the financial institution authorizes a credit limit, which is the most that can be owed on the card at one time. The credit limit can depend on factors including income, credit history, and other debts owed.

How Credit Cards Work

Credit cards are established via a payment network such as Visa, Mastercard, Discover, or American Express. Payment networks process credit card transactions and make sure the merchant is paid and the correct cardholder is billed.

Your card can be used with any merchant that participates in the network associated with your card. Payment network information is usually posted at the business entrance and/or sales desk, and on the website of an online vendor. Each time you use your credit card, the purchase information is recorded by the payment network. The amount of each transaction is added to the balance you owe the card issuer.

If the credit limit on the credit card is reached, transactions could be rejected by the payment processing network. The business you are trying to pay can tell you that the card has “been declined” but won’t have detailed information about your account or why the transaction was declined. Contact the card issuer directly to learn why the transaction was rejected.

The card issuer will send a statement each month that shows how much was charged on the card since the previous statement, payments made, the full amount owed as of the statement date, the amount of available credit as of the statement date, and the payment that must be paid on or before the due date in order to avoid additional charges or penalties.

Responsible Credit Card Management

Responsible credit card management includes reviewing your account activity, making all payments on time, and not exceeding your credit limit. Information about your credit card payments is shared by the payment network with the credit agencies and becomes part of your credit history.

• Making payments on time can help build your credit history and improve your credit score.
• A record of timely payments could result in the financial institution offering you a higher credit limit.
• Reviewing your statement each month can alert you to errors or potential fraudulent use of your credit card so you can contact the merchant or the card issuer for help.
• Knowing how much you owe on the card can help avoid the stress of a declined payment if you have reached or exceeded your credit limit.

Mismanagement of a credit card includes failing to make payments on time.

• Late or missed payments could result in late fees, an increase in the card’s interest rate, and a decrease in your credit score.
• Repeated mismanagement could cause the card issuer to cancel the card, close the account, and begin the collections process for delinquent accounts.
• Credit card mismanagement and issuer actions taken become part of your credit history and negatively affects your credit score.

Is a Credit Card Different than a Debit Card?

Credit cards and debit cards both carry the logo of a payment network and are accepted by businesses participating in those networks, but there are important differences between the two types of cards.

Using a Credit Card

• When using a credit card, you borrow money from the credit card issuer and must pay it back.
• You may be charged interest on the balance owed, based on the rate and terms specified in the credit card agreement.
• If you try to charge more than your account’s credit limit, the transaction could be denied by the payment network and you may be charged a fee. 
• Credit card payment information is reported by the card issuer to one or more of the credit reporting agencies (Equifax, Experian, and TransUnion), which compile information to prepare credit reports and create credit scores.

Using a Debit Card

• Payments made with a debit card use your own money. The debit card is linked to your checking or savings account, and the money for the payment is taken out of your account and transferred to the seller or service provider.
• There may be daily dollar limits to debit card usage set by your financial institution.
• If the daily limit has been reached, or if there isn’t enough money in the linked account at the time of purchase, the transaction could be declined by the payment network.
• Debit card transactions are not reported to credit bureaus because you are using your own money and there is no credit involved.

Making Payments

When the monthly credit card bill arrives, you have the option to pay the entire account balance, a minimum payment amount set by the card issuer, or an amount in between. You must pay at least the minimum payment amount on or before the due date to avoid late fees and potential damage to your credit score.

• Paying the minimum payment amount each month will cost the most in interest, takes the longest to pay off the balance and is the most expensive option.
• Paying more than the minimum payment each month will help you pay off the balance faster.
• Paying the full balance each month will provide you with a grace period that avoids you having to pay interest on the purchases.

Credit card payments and account balance levels are reported to the credit agencies.

• Payment history counts for 35% of your credit score — a three-digit number that indicates how risky it could be to lend you money.
• A high credit score indicates creditworthiness and is a favorable sign to creditors.  A history of on-time payments can help raise your credit score, while even one late payment can lower it.
• Credit history and credit score are important factors when applying to borrow money for a vehicle or a home.

Who Can Get a Credit Card?

Generally, a person must be 18 years old and have a source of income to be issued a credit card in their own name. There are some exceptions.

• A parent or guardian can request a supplemental card for their account to provide access to credit for a child under age 18.
• A parent or guardian can co-sign a credit application for a person who is under age 18 or without a source of income. If the bill isn’t paid by the person named on the account, the co-signer is responsible for making the payment.
• A person might be able to open a checking and/or savings account at a bank or credit union and agree to maintain an amount equivalent to one month’s credit limit in the savings account. If the monthly credit card payment isn’t made, the financial institution could take money from the account to cover the payment.

To learn about products and services offered by Enterprise Bank including checking accounts, savings accounts, and consumer card services, please visit www.enterprisebanking.com. If you would like to speak to an Enterprise Banker about opening an account, we invite you to call us at 877-671-2265 or visit one of our convenient branch locations.