How Do Credit Cards Work?

Misunderstanding how credit cards work can destroy your finances. To avoid ruining your finances, upon getting a credit card, be sure to understand how your credit card works. At first glance, credit cards may appear to have a lot of the same features in common with one another. Under the surface, however, each credit card can work differently. This is where your credit card agreement can be incredibly helpful.

What’s a credit card agreement? Simply put, it lays out the terms of use for your credit card, stating in clear terms the consequences of every action that you perform with the card. Here’s an example from Bank of America. In this article, rather than teaching you the mechanics of a credit card, we’ll be teaching you how to read your credit card agreement so that you can use your credit card while knowing full well the consequences of every spending decision that you make with your card. We’ll also be covering 3 common problem scenarios that we see our customers face when using credit cards and how they can be resolved.

I agreed to what?

We get it. Credit card agreements can be hard to understand. Here are 2 terms that you must know before reviewing your credit card agreement:

  1. Minimum balance - the amount you must pay every month to your credit card company. If you don’t pay this amount, you will get charged a fee in addition to interest on whatever you owe.
  2. Statement balance - this is the amount that you owe to your credit card company at any given point in time. Interest is charged on this number.


Now that you know the meaning of minimum balance and statement balance, here are 3 areas to pay attention to when reviewing your credit card agreement:

  1. Your Annual Percentage Rate for Purchases (APR)
  2. Your Penalty APR
  3. Late Fees

Annual Percentage Rate for Purchases


Your Annual Percentage Rate (APR) defines how much interest you’ll be paying on an amount based on the credit card statement balance (the amount you owe to your credit card company) that you choose to carry over (or roll over) to the next payment cycle. If you do not roll over a balance, you won’t get charged interest. Simple.


Penalty APRs

A penalty APR will mean higher interest - indefinitely in some cases. For some cards, this can mean an increase in the interest on your statement balance of up to 30%. You can call your credit card company to ask for that penalty APR to be lifted, which can work. A penalty APR is the result of not paying your minimum payment, which is the amount that you must pay towards your credit card statement balance every month assuming that your balance is above 0. 


Late fees

If you don’t pay your minimum balance on time, you get charged a fee. This fee is usually $30-40. These fees can quickly pile up, especially if you’re facing circumstances that prevent you from even making minimum payments. 

3 Solutions to 3 Problems

At Harvest, our users usually come to us with one or more of these 3 common problems: 

  1. They have a penalty APR
  2. They have late fees
  3. They can’t pay off their statement balance

Having a penalty APR on your account can be a problem that can be resolved through consistently positive payment history after the penalty is applied, which you can then quote when calling your credit card company to ask for the removal of that penalty APR. Don’t have time to contact your credit card company? We at Harvest Platform have consistently been able to reduce APRs for our American Express customers so if you have an American Express card for which you want a lower APR, we’d love to see how we can help!

Late fees can be potentially refunded again if you reach out to your credit card company. Be sure to mention your long-standing customer loyalty and your otherwise excellent payment history. Extenuating circumstances that caused you to make a late payment can also help with the refund process. You can also reach out to your credit card company before a payment is due to ask for a late fee waiver in advance. If you do decide to reach out, be sure to mention any extenuating circumstances that you’re experiencing, which can help with your case for a waiver. When it comes to getting past credit card late fees refunded, we at Harvest Platform have experienced a particularly high refund rate with our Chase, Wells Fargo and American Express customers so if you have a credit card with any one of these companies, feel free to reach out to see what we can do for you. For all other financial institutions, we also provide the script you need to do the negotiations yourself free of charge should you choose to do so.


As for not being able to pay off a statement balance, the best course of action in this case would be to enroll in a payment plan as well as ask for an APR reduction to minimize the burden imposed on you by future payments. If your debt has been sent off to collections, perhaps look into debt relief services that may be able to help with paying off your debt. Do be careful though since not all debt relief services are credible and may impact your credit score.

Closing Thoughts

Understand how credit cards work so you can avoid late fees, penalty APRs, and out of control statement balances. This starts with first understanding how a credit card works and the terminology used to describe features of a credit card, which can help inform your decision on which credit cards to apply for and how to manage the cards you end up using. 


Want a better rate of interest on your credit card? Looking for ways to reduce your monthly credit card payment? Need some old late fees refunded? We can help! At Harvest, we know that every bit counts so if you need help lowering a monthly credit card payment by securing a lower rate of interest on your credit card or getting some late fees refunded, head on over to Harvest to see what we can do for you!