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WalletPrep worksheet · Debt

How do credit cards work?

Name ____________________ Date __________

Key ideas

  1. A credit card spends the bank's money. The bank pays the store and you owe the bank. A debit card takes money straight from your own checking account.
  2. Pay the full statement balance every month. Do that by the due date and purchases cost no interest. In the example, Priya pays $600 and owes $0 in interest.
  3. The minimum payment only avoids a late fee. Whatever you leave unpaid starts charging interest. If Priya pays $25 of $600, about $11.50 of interest follows.

Vocabulary

Grace period
The time between the end of a credit card billing cycle and the due date, when new purchases are interest-free if you paid in full.
Minimum payment
The smallest amount you must pay on a credit card or loan by the due date to keep the account in good standing.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.

Work it out

Priya, 26, just got her first credit card with a $2,000 limit. Her first statement balance is $600, with a $25 minimum payment and a 24% APR.

  1. Statement balance
  2. Paid in full by the due date
  3. Carried over (no interest)
  4. Statement balance
  5. Minimum payment only
  6. Carried to next month
  7. Monthly rate (24% ÷ 12)
  8. Interest next month ($575 × 2%)

Check yourself

  1. Which card takes money straight from your checking account?

    • A. A credit card
    • B. A debit card
    • C. Both kinds of card
    • D. Neither kind of card

  2. Your statement balance is $800 and the minimum is $30. You pay $30. How much is carried over and charged interest?

    • A. $0
    • B. $30
    • C. $770
    • D. $800

  3. What must you do to pay no interest on purchases?

    • A. Pay the full statement balance by the due date
    • B. Pay the minimum payment on time
    • C. Stay under half your credit limit

Your turn

Open your card account or your last statement and find three numbers: the statement balance, the minimum payment and the due date. Then set autopay to pay the full statement balance each month.

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Answer key

How do credit cards work?

Work it out

  1. Statement balance$600
  2. Paid in full by the due date− $600
  3. Carried over (no interest)= $0
  4. Statement balance$600
  5. Minimum payment only− $25
  6. Carried to next month= $575
  7. Monthly rate (24% ÷ 12)2%
  8. Interest next month ($575 × 2%)$11.50
  1. Priya pays the full $600 by the due date. $600 − $600 = $0 carried, so the grace period applies and she pays no interest.
  2. If she pays only the $25 minimum, $600 − $25 = $575 rolls into next month.
  3. At 24% a year, the monthly rate is 24% ÷ 12 = 2%. Interest is about $575 × 2% = $11.50, plus interest on any new purchases.

Check yourself

  1. B. A debit card A debit card pulls money from your checking account right away. A credit card spends the bank's money, and you repay it when the bill comes.
  2. C. $770 $800 − $30 = $770 rolls into next month and is charged interest.
  3. A. Pay the full statement balance by the due date On most cards, paying the full statement balance by the due date keeps the grace period, so purchases cost no interest.