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.
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.
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 credit purchase at a retail store or service outlet, the card is swiped into a special processing machine that retrieves your account data. If you buy online, you will be asked to enter your credit details over the merchant's website. Online shopping can be dangerous, so make sure that the site is secure before sending your credit information over the Internet. When the purchase has been approved, the credit card supplier will send you a bill for the amount spent. You are required to pay the full amount, or send partial payment. If you pay in full, the credit card supplier won't charge interest.
Some people choose to make only a partial payment, in other words, not paying off the full amount of their purchases made during the previous month. If you do that, you will be charged interest. And interest generally is applied retroactively to the day you made the purchase. If you make several purchases, or buy things that are expensive, the interest can add up surprisingly fast. This is how the card companies earn their revenues. They also sometimes charge late fees if you fail to pay some or all of your bill by the due date.
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.
