Credit Cards: Introducton
Those little rectangles of plastic called credit cards have become an almost ubiquitous component of modern life. So much so that if you're one of the small percentage of people without a credit card you may well find it dificult buying tickets, reserving hotel rooms or even renting a car. It's almost as if the credit card has become an extension of our identity. To own one is to be a paid-up member of modern consumer society. What, then, are these wallet-sized pieces of plastic and how do they work? First we'll start with the basics.
What is a Credit Card?
The dictionary defines a credit card as 'A card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company which in due course is reimbursed by the credit card holder who will be charged interest at the end of the credit period if money is still owing.'
This means that using a credit card is effectively like taking-out a loan. That loan must be re-paid to the credit card company (the lender) within the credit cycle (billing is usually every 30 days and thus the credit period can vary from 7 days to 45 days depending on when the purchase was made). If the money is not repaid within this time an interest charge is levied (applied) to the remaining balance.
What a Credit Card isn't
A credit card is different from a debit card in that the credit card issuer lends the consumer money rather than having the money removed from an account. It is also different from a charge card (though this name is sometimes used by the public to describe credit cards) in that charge cards require that the balance be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged.
Advantages and Disadvantages of Credit Cards
The obvous advantage of a credit card is that you can defer payment that is, you can buy something now and pay for it in 30 days' time. Thus you can buy goods or services that you may not immediately be able to pay for. As the credit cycle is a revolving 30-day one this may help one to budget over a couple of months. If your next credit card bill is paid in full then all is well and you have just paid for something and received it interest free for up to thirty days. However, these days, the majority of people do not pay their credit card bills in full each month and this is where a number of a credit card's disadvantages begin to become apparent.
Any amount outstanding on a credit card bill accumulates interest each and every month. Depending on the specific card issuer and the terms of the credit card itself this interest rate can be huge (sometimes up to 35% per year depending on your territory). In additon many people continue to purchase things with their cards even when they're not alrady paying their existing balance so that the ammount they owe continues to rise, as does the interest they are charged. Eventually the entire process begins to snowball until there is almost no hope of paying-off the outstanding balance and they resort to paying no more than the minimum amount each month.
Credit Requirements for Credit Cards
If you're like me then you'll probably be receiving either applications for or pre-approved applicatons for credit cards almost every other day; each with its own, different special offer. However, if you look at the fine print associated with these cards you may well notice that they have annual fees, special conditons or high interest rates asssociated with them. Which is not to say that there aren't bargains out there — there are — it's just that these tend to be rather few and far between.
To get the best possible interest rate with no additional fees, the credit companies will look at your credit history for information. They will check to see that you are responsible with your credit and have paid your bills in a timely manner. Signs of stability and credit responsibility will go a long way in reducing the amount of interest that card company will charge you. Outstanding loans with late payments and too much available credit will work against you.
The truth is that though credit cards can be an essential tool in an emergency the issuing banks actively want you to use your card as much as possible. They make money from the vendor on every transaction as they make money from you for every late and/or deferred payment. As a result credit card spending and balances can quickly get out of hand. If you are thinking of getting a credit card plan in advance what you are getting it for. Remember that it is a tool to be used wisely. For example, you may want a low-limit card for using solely on-line to limit your liability in internet transactins.