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Credit Cards: How They Work

By: Robert Jonsonn

There is a perception by many people today that having a credit card, or several, means they do not have to bother with setting a monthly budget for themselves. The seeming ease of having a credit card to buy whatever they want, when they want it, hides the fact that there is a price to pay with ownership of credit cards.

Credit cards might seem like the pot at the end of the rainbow to small kids, but in reality, they are more like tiny bankers in our pockets. We are tapping into a loan with each purchase, and while that allows us to make impulse buys (not a good idea most of the time), it also makes it easy for the "banker" to charge us interest. The short-term benefits of having the credit have long term consequences of paying off the "loan" before compounding interest kicks in and starts hurting.

Today it is easier than ever to get approved for a credit card application. Most card suppliers continually mail advertisements and application forms to households. After mailing in the application, most people will receive a card in the mail in a short time. There will likely be a fairly conservative spending limit placed on the card at the beginning, though this can rise over time. You will be able to purchase goods or access cash from the supplier's "bank" up to your monthly spending limit.

On the back of your credit card is a black strip that is encoded with secure information about the card and about you. During a transaction at a retail store, the machine at the cash register will read the information on the strip and communicate with the headquarters of the credit card supplier. Your payment status will determine whether the supplier will authorize the current transaction. There are millions of places that accept credit cards in person, and many more that accept cards by telephone or on the web. You can also use your card to withdraw cash from ATM machines that accept your particular card type.

There are many credit card suppliers, but seven of them represent the bulk of the industry. VISA and MasterCard are the two dominant players, as well as American Express, Citi, Discover, Diners Club, and JCB. Don't be fooled by the fact that many banks or other organizations arrange partnerships with the big credit card suppliers to create branded cards that have the logo of both companies.

When you make a purchase in a physical store, you are generally asked to "swipe" the card by sliding the magnetic strip through a card strip reader. When you purchase online, you will be asked to provide your credit card details on the web site itself. Be certain to check for the secure lock image in the bottom right corner of your browser before you purchase online, as there are some unscrupulous operators online, as in all parts of life. Once your puchase is approved, your credit card supplier will mail you a bill for your purchase. You can either make a partial payment, or preferably, pay the full amount of your purchases for the previous month. If you do pay the bill in full, on time, you will not be charged interest.

Of course, some customers make only a partial payment on their monthly bill, instead of paying the full amount. They are then charged interest, and the interest is retroactively charged back to the date of the original purchase. With several purchases, or a few expensive items, interest rates can build very quickly. Credit card suppliers charge high interest rates, as this is how they generate their revenues. If you pay your bill late, you may also face late fees.

There are definitely convenience factors attached to carrying a credit card. However, the convenience must be balanced against the high interest rates, and potential for making purchases we do not really need, but rather merely desire in the heat of the moment. The best advice is to pay your monthly card bill off in full every month, even if it is hard to do. Thus you will have all the convenience of using the card, without the pain of the high interest rates.

Article Source: Main Articles

Robert Jonsonn writes for various busy web magazines, on health products and consumer protection topics.
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