Credit cards and the way you use them have an increasingly powerful impact on your life. Use a credit card the right way and you’ll be rewarded higher credit limits, lower interest rates, and a good credit score. But, using a credit card the wrong way can have devastating effects. You could end up with bad credit, high interest rates, and difficulty getting other credit based products.
What is a Credit Card?
Credit cards are so prevalent, most kids and teenagers realize they’re at least a piece of plastic that can be used to make purchases. But credit cards are more than that. A credit card is a form of payment that lets you make a purchase without having to pay for it upfront. Instead, you repay the credit card balance over time, paying a fee each month you have a balance on your credit card.
Credit card companies face a big risk when they give you a credit card – that is the risk that you won’t repay the balance of the purchases you’ve made. It takes more than just your word to prove that you’ll pay your credit card as agreed. Credit card issuers look for a history of timely credit card payments to believe that you’ll pay back your credit card. They also look at your age, income, and the other credit obligations you have.
Because credit card companies are businesses who operate for a profit, they look for ways to make money from the people who carry their credit cards. If you have a credit card in your wallet, that includes you. Credit card companies make money in two key ways – interest charged on revolving balances and fees.
A Little Credit History
The first credit card was created by a group of businessmen who decided that rather than carrying a few charge cards for several retailers, there should be one universal credit card that was accepted by several different businesses. The idea grew and a few years later, the companies we know as VISA and American Express came into existence. Not long after that, MasterCard and Discover also came along.
These four companies – VISA, MasterCard, American Express, and Discover – are payment networks who process payments made to merchants by customers. VISA and MasterCard issue their credit cards through other financial institutions like Capital One, Chase, or even your local bank.
How Credit Card Purchases Work
There’s a lot going on behind the scenes when you use your credit card to make a payment. Let’s say you have a Capital One VISA and buy groceries from Kroger. Just like you have a bank who processes your payments, so does Kroger. This type of bank is known as a merchant bank. Whenever you make a payment using your credit card, the Kroger’s merchant bank contacts Capital One to make sure it’s ok to approve the transaction. Capital One says it’s ok and VISA pays for the purchase. Then, VISA charges Capital One a fee for paying your purchase. Capital One makes money by charging you interest and other fees.
American Express and Discover operate a little different VISA and MasterCard, because they issue their own credit cards. They’re also not as widely-accepted as VISA and MasterCard.
Where to Find a Credit Card
You don’t have to look far for a credit card. In fact, credit card companies are looking for you. You’ve probably received credit card offers in the mail, even if you’re not old enough to get a credit card. Responding to one of these credit card offers is one of the easiest ways to get a credit card. You can also check to see if your local bank issues a credit card. Visiting the websites of some well-known credit card issuers is also an option.
Credit cards are easy to find. The key is to choose carefully because not all credit cards are the same. Some credit cards come with annual fees, while others may have higher interest rates. When you’re choosing among several different credit cards, How to Pick a Credit Card will help you separate the good from the bad.
Get the Credit Card Basics Every Cardholder Needs
Every credit card user must know the basics of credit cards, like what are some of the fees credit cards charge and what are the different credit cards. Some of these things you can learn on your own through years of experience. Or, you can learn from the experience of others.
If you’re just starting out with credit cards or you never learned the basics of credit cards before you started using them, these articles will help you become acquainted with credit cards.
- How to Qualify for a Credit Card
- The 8 Most Important Credit Card Terms
- Credit Card Fees to Watch Out For
- How to Pick the Right Credit Card
- 5 Types of Credit Cards
- What is a Secured Credit Card?
- Which Credit Card is Best for You
- 9 Smart Ways to Use Your Credit Card
- The Best Way to Cancel a Credit Card
- What You Need to Know About Interest Rates
- How Finance Charges Are Calculated and How You Can Avoid Them
- The Importance of Paying on Time
- Tips for Making a Credit Card Balance Transfer
- 5 Reasons to Avoid a Cash Advance
- Laws Protecting Credit Card Users
After reading the articles above, you’ll have a general understanding of how credit cards work. You’ll know important credit card terms, the types of credit cards, and how to pick and use a credit card the right way.
