Credit Cards: How They Work

By: Robert Jonsonn


Our society depends so much on credit, setting a monthly budget just doesn't seem to matter anymore. Having the luxury of an easy and hassle-free spending alternative makes it too easy to buy the things we want, without saving for them. Credit cards can make shopping easy. But hassle-free? No way.

Children often say that credit cards are a source of free money. It's charming, but we know better. For a tiny piece of plastic, the credit card sure wields a lot of power over most people in industrialized societies. It acts like a tiny bank loan in our pockets, and allows people to make impulse purchases without having the cash in hand. It makes buying a lot easier in the short term. Of course, the hard part involves paying back the "loan" before the interest begins compounding.

To obtain a credit card, you must first submit an application form that serves as an agreement between you, the credit card consumer, and the credit supplier. If you application is approved you will receive a credit card. The card enables you to make purchases or access cash, as if you are borrowing the money from the credit supplier. There is a pre-determined spending limit applied to your account, and the supplier may limit the amount you can spend on a monthly basis.

The flipside of the plastic card has a magnetic strip which is encrypted with coded security and demographic information. The information held in the strip is transferred during a transaction to the retailer's machine to allow it to communicate with the card supplier and authorize your payment. Millions of retailers accept credit cards. You can also use the card for purchases over the telephone or on the Internet, depending on the merchant's ability to accept payment of this kind. Finally, credit cards can also be used at ATM cash machines to withdraw cash from your credit card account.

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.

Going to a traditional retail store and making a purchase will require you to "swipe" your card through the slider on the side of the small machine at the check out register. The store clerk will handle the rest. Buying goods on a web site means you will need to type in your credit card details on the site itself. Make sure the site you are visiting has a secure "lock" image in the bottom right corner of your browser. This indicates the site is a secure place to purchase. You will get a receipt for this purchase from the web site, and also a mailed bill from your credit card supplier with your monthly statement. You can choose to pay your bill off in full, taking your balance down to zero, and you will not be charged interest.

Here's where credit cards can be difficult. If you opt for making a partial payment of simply meeting your minimum obligation, you will be charged interest. If you have made numerous purchases or used credit to buy expensive items, the interest can add up very quickly. This is how the credit card suppliers make their money. Late fees can also be charged, so be sure to make your payment on time.

Credit cards are convenient and useful for today's shopping environment. However, the ease of use can seem pretty small compared to the huge pain of paying off debts owed on credit cards. Interest rates are usually very high. So try to pay your balance off in full every month. You will gain the convenience, without the pain. There is nothing wrong with using cash for most purchases, either, so don't feel that a credit card is mandatory.

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Information about the Author:

Robert Jonsonn is a columnist for various popular online magazines, on personal health care and consumer protection themes.
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