Credit Cards

What are credit cards?

Credit cards are available in a wide variety offering flexibility for the payment of most types of purchases and bills. Credit card holders receive an assigned account number, a spending or borrowing limit, and a payment due date for their account. The issuer of the account provides a small rectangle of plastic that includes the consumer's name along with the account number, expiration date of the account, and security numbers. This card is used in lieu of legal tender to make purchases or pay for services.

Each credit card has an attached line of credit that indicates the total amount of money that the consumer may borrow through this account. This limit can be used solely to make purchases or in combination with cash advances, convenience checks, or transferred balances. If the card holder takes advantage of any of these three practices, interest rates are charged on the balance until the debt is repaid.

A cash advance allows the consumer to access or borrow a sum of money that can be repaid at a later date. Transferred balances switch the debt from one account to another. Convenience checks are used similarly to personal or business checks.

Additionally, while the cardholder has the option to repay the debt in full each month, he is not required to do so. Instead, he can pay a portion of the debt referred to as the minimum due and roll over the remaining debt to the next payment. The card issuer will assess interest charges against the balance remaining on the account.

When were credit cards created?

Although the concept of using credit dates back to the late 1800s and metal charge plates, today's plastic version did not come about until 1950 or so. Prior to that date, several different enterprises offered their best customers the opportunity to use credit when making their purchases. Typically, this type of purchase involved the use of a metal plate imprinted with identifying information about the customer. This type of practice was used by large gas or oil companies and department stores.

Some individuals believe that the credit card had its birth with the "Charg-It" card issued as a bank card that could be used at local stores and businesses. The problems with this card were that the cardholder needed to have an account with the bank that issued the card, the "Biggin's Bank" and the card had to be used with local area merchants.

However, in 1950, two men who were business partners created the "Diners Club Card" as the result of forgetting to bring money to a business dinner. The two men were representatives of the Diners Club named Frank McNamara and Ralph Schneider. This is the first card that could be used throughout a widespread area and for multiple purposes.

How do credit cards work?

To use a credit card, a consumer first needs to complete an application requesting a credit card account. This process can be done online, over the phone, or through the mail. Once the consumer is approved, he will receive a credit card in his name with an account number, credit limit, interest rate, and due date. Of course, a few other pieces of information will be included in the documentation that comes with the credit card. It is a good idea for the consumer to read this information as it will include important terms such as default terms, late fees, convenience check fees, membership fees, and more.

Credit cards allow consumers to purchase an item through credit rather than actually having to pay for the item with money. It is possible to use credit cards online, over the telephone, or in person. Each time the consumer signs his name or provides his account number and/or PIN (personal identification number), he is agreeing to repay the issuer of the account when the bill comes due. Since the cardholder has already received approval for the account, purchasing with credit simplifies the process.

Typically, each merchant or business checks the validity of the account by running the number through an electronic system. If the account has a fraud alert on it or if the account is overdrawn, then the purchase usually will not go through to completion. Some companies allow consumers to overdraw on their account, but they charge an additional fee for this.

What are the interest charges on credit cards?

Typically, interest charges are waived when the balance due on the account is paid in full by the due date as long as no balance is carried over from prior months. The time period between the purchase and the due date is often referred to as the grace period. However, if the balance is not paid in full, the interest charges will accrue on any unpaid balance from the date of purchase. In fact, some credit card companies will charge interest on the entire purchase even if a portion of it has been paid.

The details explaining how interest charges accrue on a specific account are included in the cardholder agreement that is issued with the account. It's important to understand that any account with multiple interest rates attached to it will have the highest applicable interest rate charged. For example, transfers and cash advances often have different interest rates than the primary account interest.

What are the benefits of credit cards for the cardholders?

Most credit cards offer several different types of benefits and are consumer friendly. The primary benefit involves the ability of consumers to use a single credit card to make purchases at a number of different locations. In addition to not having to carry a lot of cash around, consumers don't have to carry around a lot of credit cards either since one account can be used at multiple locations. Another important benefit to cardholders is that the company issuing the account will negotiate for them with the merchant if the purchased product does not meet up to the specifications portrayed when purchased. Additionally, consumers can usually afford to purchase items before they have the cash to do so.

What are the benefits of credit cards for the merchants?

Multiple benefits are attached to credit card purchases for merchants. This type of purchase is more secure than purchases made with personal checks or store credit since the individual's credit worthiness has already been evaluated by the company issuing the account. Additionally, it reduces the potential for store employees to steal large sums of money since more sales are generated through credit card use. Prompt payment is guaranteed by the credit card company to the merchant and eliminates the failure-to-pay scenario.

What types of credit cards are there?

Credit cards are available with so many different types of rewards and perks that it makes if difficult to select just one. Among the choices, consumers will find prepaid, reward, secured, airline, gas, low interest, balance transfer, cash back, bad credit, instant approval, and more. Each of these cards provides special values while operating under slightly different rules of credit. Additionally, credit cards have been designed for specific types of consumers as well. There are cards designed for students and business owners along with all of the many different types of cards designed for the average consumer.

Why are there so many different types of credit cards?

Credit cards vary in nature for two very big reasons. The first reason happens to do with the type of customer or card holder that the credit card company wants to attract. The second reason follows from the existence of a wide variety of customers all of whom have a variety of credit backgrounds as well as a diversity of needs. The important fact here is that credit cards exist for all types of consumers.

The type of credit card that any one person applies for or is approved for might be related to the type of credit history they have, such as good credit versus bad credit. For example, an individual with bad or less than excellent credit might only qualify for a bad credit or prepaid credit card. Another reason behind someone's selection of a particular type of credit card would be their personal spending habits. For example, someone who travels a lot might prefer to get a gas credit card with earnings based upon their usage.