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How do credit cards work?
The basics of credit cards explained.
Image: Adam Gault - Getty
What is a credit card?
Put simply, a credit card is a way to borrow money. Once your application to a bank, building society or specialist card issuer has been accepted, a card is created which is unique to you. It bears your name, a one-off number and the dates on which it was issued and will expire.
A credit card will also come with a set credit limit - the amount you can borrow. This may not be the one you asked for in your application but one set by the issuer which could be increased if you demonstrate you can make regular repayments on time.
How does my credit card work?
You can use your credit card to buy goods and services and you'll get a statement each month showing how much you've spent.
You have to pay back at least the minimum amount shown on the statement each month which is usually 2% to 5% of the amount due.
Ideally, the full balance should be paid off in full each month. If not, the card issuer will charge you interest each month on the 'outstanding balance', which is any money you still owe.
When you hand over your card, the electronic system used by the retailer will read the encrypted details contained in the black information strip on the back or the chip on the front. This will record your card number, name, expiry date, limit and the cost of the item you are paying for. It will also record the shop's identification number.
The shop's bank checks your card detail against your card issuer's database and then provides a guarantee to the shop that it will get paid. You can then enter your Personal Identification Number (PIN) to authorise the transaction and it is then completed.
Your card can be used in millions of places around the world, online and via telephone, so it really can be a flexible friend.
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