Credit cards today are as American as baseball and apple pie. Almost every household has at least one card, and most households carry balances from month to month. These plastic cards, which date back nearly a century, represent the most common type of credit. They make everyday purchases more convenient and allow easier online shopping.
They allow cardholders to borrow money as needed, up to a certain limit. In exchange, debtors promise to repay the full amount borrowed, plus interest, to the creditor. However, for many people the convenience of credit cards turns into a negative, allowing them to rack up debt that they cannot repay.
Different Types of Credit Cards
There are several types of credit cards. Although they can be used in different ways, they have one thing in common. They are all considered revolving debts. meaning they allow consumers to carry balances from month to month and repay loans over time.
Some common types of credit cards are:
- Traditional cards – These are standard credit cards that are used to charge purchases. They come with few bonus features, if any. One key advantage is that they are accepted nearly everywhere.
- Premium cards – These cards have features built in, like automatic warranties and emergency services. They typically have high credit limits and may offer rewards like cash back or airline miles. Unfortunately, most of them come with annual fees and may not be accepted everywhere.
- Retail cards – These cards can only be used at certain stores or chains. Cardholders typically receive merchandise discounts when they use their cards. These cards may include online shopping deals, as well. Look out for higher interest rates.
- Gas cards – Consumers can benefit from these cards, but only if they purchase gasoline at the same chain every time. Rewards can include a price break on gasoline or other purchases.
- Secured cards – These cards are secured by assets. often a cash security deposit, to protect the card issuers. These cards are typically used by individuals with damaged credit and can help them rebuild their credit. The credit limit typically starts low, but may increase over time.
How Credit Cards Work
First you’ll find a card that suits your needs. You can consider offers you receive in the mail, but also do some research online. When shopping for cards, think about how often you plan to use the card, whether you plan to carry a balance each month, and what rewards you’d like to see. Be sure to read the fine print before applying. Pay close attention to the fees associated with the card.
Regardless of what type of credit card you have or that you are interested in, the card works in the same basic way. If you’re approved for a new line of credit, the card company will issue a card along with information about interest rates, spending limits and payment deadlines. Issuers determine your rates and fees largely based on your credit score and history . Although interest rates are capped by law. they can be very high and cost you thousands of dollars over the years.
Once approved for a card, you will get it in the mail and then you will have activate it, usually by phone. After that, you’re reading spend. Depending on the type of card you have, you should be able to charge purchases at most of the stores you visit. Make sure you don’t go over your limit. as this could cause you to incur overage charges.
At the end
of each month, you’ll receive a bill and statement. Review each statement carefully to ensure that you made each purchase listed. If there’s something you don’t recognize, you may be a victim of identity theft .
If you have no questions or concerns about the statement, pay the bill. It’s important to pay it on time every month. A late or missed payment could harm your credit score. Also be aware of your total balance, rather than just paying attention to the minimum payment. The best practice is to pay off your balance in full each month so as not to accrue credit card debt. Paying only the minimum amount could keep you in debt for years longer and will end up costing you more in interest.
How Credit Card Companies Make Money
Credit card companies make billions of dollars each year off of consumers and consumer transactions. While it’s a commonly held belief that most of the industry’s money comes from interest charges, this only tells part of the story.
Here are the main ways in which credit card issuers make money:
- Card companies make a large portion of their profits from actual purchases and credit transactions. Most card issuers keep about 2 percent of the money from every transaction. That means that if you buy $100 worth of groceries with a credit card, the grocery store only receives $98 and the card issuer receives the other $2.
- The rest of the money comes from you, the consumer. Credit card issuers make money not only from your interest payments but also from any fees such as late fees, overage charges and annual membership dues.
How much does this amount to? In 2011, the credit card industry’s total revenue was $154.9 billion. The year’s profits totaled $18.5 billion, or about $116 for every American with a credit card.
Credit cards can be a useful tool, but only when they are used properly. When you open a new credit card account, be sure you know exactly what you’re agreeing to. Familiarize yourself with all of the fine print, don’t buy what you can’t afford, and pay your bills responsibly.
Credit Cards: Then and Now
Specific stores and chains started administering charge cards in the 1920s. Their use was limited to the issuing stores and, like some of today’s charge cards, the balances needed to be paid in full each month.
The modern credit card evolved from there, gaining momentum in the post-war boom of the 1950s. American Express and Bank of America first offered cards in 1958.
Debit cards were close behind, entering the market in the mid-1970s. These cards are linked directly to consumers’ bank accounts. People using debit cards cannot rack up debts because they can’t spend more money than they have in their account.
Since then, credit cards evolved into more complex lending agreements that involve rewards, memberships and fees. And now, credit cards are in almost every wallet. The U.S. Census Bureau estimated that in 2012, 160 million Americans held credit cards, for a total of 1.17 billion cards. Cardholders made an estimated $870 billion of purchases with their cards in 2012.
The bureau estimated even greater numbers of debit cardholders, with about 191 million Americans having debit cards. Although debit cardholders had fewer of these cards per person – only 530 million cards in the United States – they used the cards for a greater amount of purchases; in 2012, Americans made an estimated $2.09 trillion worth of purchases using their debit cards.