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In spite of the fact that credit cards entered our life quite some time back and nowadays virtually everyone seems to possess at least one credit card, many people are still unaware of how credit cards actually work. Lack of proper knowledge often results in debts and a bad credit cards history. Meanwhile, understanding the mechanisms behind this piece of plastic can spare you a lot of trouble.

Credit card companies make money when you pay interest. The company determines the amount of interest you pay each month by using the annual percentage rate (APR). There are two basic kinds of APRs: fixed and variable. A fixed APR doesn’t vary much over a period of time. In case your credit card company decides to change the APR, they must inform you about this in advance. The variable APR can change from time to time. The kind of APR is indicated in your credit card application.

The grace period is the number of days given to pay off your credit card balance without receiving a finance charge. In most cases, the grace period only applies to new purchases that you make. If you already have a balance on your credit card from a previous month, new purchases will not have a grace period. Normally, you can find the grace period printed in your monthly credit card statement.

In some cases, certain fees can be applied to your credit card. The most common are:

1. The annual fee, i.e. a yearly fee you must pay for having the credit card.
2. The late-payment fee which is charged when the credit card company receives your payment after the due date.
3. A cash advance feethat is either a flat fee or a percentage of your advance. It can be taken in case use your card for a cash advance
4. A balance-transfer fee – a fee taken when you transfer a balance from another credit card.
5. An over-the-credit-limit fee, i.e. a fee applied when you go over your credit limit.

Most credit card companies offer special features to stimulate the use of their credit card. Among the many kinds of incentives a rebate on the purchases you have made is the most common motivation method. The rebate can be made in cash (via check) or as a credit to your credit card account. Frequent flier miles, car rental insurance, and travel accident insurance are other incentives that are offered. Often, credit cards also offer insurance that covers payments to your balance should you become disabled or unemployed.