Credit cards are everywhere. They are an integral part of the financial system we live with.
Are they a good part of that system, or are they detrimental? Well, that depends on where you look at the question from. If you look at it from the point of view of the CEO of a credit card company, then they are the best things since sliced bread. If you look at it from the point of view of the average credit card customer, they are the invention of the devil, but a handy thing to have. And if you look at it from the point of view of the vast majority of retail outlets who have to take payment through credit cards, they are an expensive nuisance. In any case, they are ubiquitous and annoyingly necessary unless you are a hermit.
Credit cards in their current form are a fairly new invention. The first charge cards were used in the 1020’s, but were not widely used. The credit card went through several different versions and styles of operation before today’s version was developed in the early 1970’s.
In general, credit cards run on the principle that everyone wants money for nothing. What a credit card does for us is allow us to believe that an item has been paid for when, in fact, it has not. Intellectually, of course, we understand that the bill has not been paid, and the act of using a credit card constitutes a promise to pay for that item, rather than actual payment, but the human brain is not very rational when it comes to money and huge numbers of people charge vast sums of money without considering the cost. That inability to consider the ramifications of using a credit card is the reason why so many people get in debt beyond their ability to pay, and end up in real financial trouble. It is a good idea to learn as much as you can about the wise use of credit cards before you get one, and keep a close eye on your spending, your interest rate, and your ability to pay off the debt.
There are several different types of credit cards, and deciding which best suits your needs is not always easy.
To start with, there are prepaid credit cards. The Financial Consumer Agency of Canada describes them as “an expensive way to spend your own money”, because after you purchase the card, you must apply your own money to create the credit balance of the card, and then you can spend that money. If you need to buy an airline ticket, or shop online, and you do not qualify for a regular credit card, then this is a useable option. It is an expensive one, though, since there are transaction fees applied to every purchase and often monthly fees are applied after a certain length of time. On the other hand, these cards do not charge interest.
Secured credit cards are somewhat different from prepaid cards in that you often must place at least 100% (and sometimes as much as 200%) of the credit limit of the card in a savings account that the credit card company is granted access to. This money acts as a guarantee that you will be able to pay for your purchases. Some cards will ask for less than 100% of the desired credit limit as a deposit if your credit rating is deemed acceptable. In any event, these cards require that you make regular payments, just as you would with an unsecured card, and that can allow people to run into trouble. If you miss a payment, the credit card company will very likely raise the interest rate on your card and charge you additional fees. If you continue to miss payments, the interest rate rises and fees increase dramatically. This situation will be allowed to escalate by the credit card company because eventually – even though they take the deposit you gave them to get the card after a specified amount of time, usually 90 to 180 days – you will still owe money due to the interest charges and fees. This is great for them, but not so good for you.
Unsecured credit cards are the most common type of card. These cards are issued to those whose credit ratings are above a certain level that is determined by the card issuer. The credit limit on your card is, they say, determined by a combination of your credit score, your credit history, and your income. The limit will be raised at certain intervals by the credit card company if you have not missed or been late with any payments. You can request a higher limit, but it is not always granted. At first glance it would appear that there are hundreds of different cards to choose from – some offer reward points incentives with certain retailers, others give you travel points or cash back on purchases. Some cards have an annual fee, others do not. Some have extremely high limits, but you must have a very high income to qualify for the card. In general, though, interest rates for purchases are about 20%, and for cash advances 23% or more. Cards with an annual fee will often have lower interest rates if you carry a balance. Credit cards come with purchase insurance in some cases, travel insurance in others. There are accident insurance clauses, life insurance clauses, and cash back incentives. It can seem difficult to choose between them at first, until you remember that they are essentially the same under the layers of fluff. The basics that you need to know are the interest rate for purchases, the interest rate for cash advances, the annual fee, if any, and the amount and method of insurance coverage that comes with your card. The incentives are usually less spectacular than the hype would indicate, but can add a little bit of enjoyment to using your card. Just remember that spending a lot of money that you will have to pay high interest on, simply to get a tiny perk is probably not very fiscally responsible. In many cases, it would be cheaper in the long run to just purchase the perk you want and save yourself the interest, rather than trying to spend enough money on your card to get that perk “free”. Add it up – it’s not free.
One of the ways that a company gets you to apply for their particular card is to lure you in by offering a low introductory interest rate. This may be wonderful in the beginning, but can be a nightmare when the introductory rate ends and the normal interest rate kicks in, as it can really increase your costs. If you consider that it takes a few months, usually, to rack up a balance on your credit card, and you have spent six months making purchases and enjoying your artificially low payments, you will get an unpleasant surprise when you get your first bill after the introductory rate has expired, and it is too late to do anything about it. If you get one of these cards, it would be wise to keep track of the interest rate and its expiry date and plan to have your balance down to a manageable level by that time.
If you have ever looked at a credit card contract, it is several pages of tiny print with so many clauses and convoluted sentences that the vast majority of people never read them in their entirety. This is a good thing – for the credit card companies. Not so much for the consumer, though. The key information, such as interest rate and annual fees, is usually presented in a clear and easy to read information box on the contract, or at least with the contract, but the rest of the information is not so clear. Even though it is difficult to get through, it is important to read your credit card contract fully so that you understand what your rights are and what your responsibilities are.
It is also important to read and understand your credit card bill every month. You should always check the list of transactions and make sure that you did actually make all of those transactions. Make sure that any payments that you have made show up on your bill as a credit. And always look at the information included on your bill where it tells you how long it will take to pay off your balance owing completely if you only make the minimum monthly payment. Your bill will also show the amount of interest charged. This number should make you very cautious about carrying a balance on your card. If you think about it, if you bought something for $1000, and you pay off all but $10 of that on your next bill, you will still be charged interest on the full amount. That can get expensive, but you must understand that credit card companies aren’t in business to make you rich.
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