A credit card is a wallet-sized plastic sheet with embossed numbers on it and a magnetic strip used to access an credit account created explicitly for that card. Credit cards allow you the convenience of buying an item and paying later. Credit card issuers charge fees and interest for this service.
Credit cards are billed (ha-ha) as a wondrous convenience in modern society. Instead of carrying around large amounts of bills and change, a single credit card can be used as money in most common financial transactions. Credit cards can also be billed automatically, allowing your gym to bill you every month, regardless of whether you bother to show up to lift their heavy iron bars.
The truth of credit cards is far different from the nearly magical benefits described.
Getting a Card
To obtain a credit card, you have to have a minimum financial history. Without one, you probably will still be able to get a card of some sort, such as an ATM card or a debit card. These will be used to build your credit history. If your credit score based on that history and other debt requirements pass the minimums required by the credit card issuer, they will probably send you a card. You may have several in your mailbox as we speak.
Your initial card will probably have a high interest rate. Interest is typically charged on your balances after a certain amount of time has passed, usually by the end of the billing period in which you make the purchase. Once interest starts accruing, it compounds daily and continues until you bring the balance down to zero.
Paying the Bill
Credit card payments are designed to pay the card balances off over extremely long periods of time; 30 years is common. This means that interest will compound for a very long time, exponentially increasing the cost of that Harry Potter 10 year Anniversary Commemorative Pencil set that you bought.
Fees and Features
Many cards charge an annual fee. For those with good credit scores, no fee cards are often available. The issuer then makes his profits from interest charges or from fees. Late fees are now common. The billing cycle is the time between when the statement is issued and the payment is due. Shortening the billing cycle is one way issuers increase income. Others charge fees for exceeding your credit limit.
Affinity cards, where the card company issues a card with a company name such as an airline on the card, are now common. Many charge annual fees, but offer rewards in the form of points or "miles" that can be redeemed for free tickets or sometimes for cash. Rewards cards that rebate 1 or 2% of charges as cash or gift certificates are also available.
Related Fool Articles
Recent Mentions on Fool.com
- The Standard vs. Itemized Deduction: Plan Ahead to Lower Your Taxes
- Dear Brian Moynihan: You?ve Done a Good Job so Far, But Now Comes the Hard Part
- Why This Black Friday Is So Important for J.C. Penney
- Will Obama's Immigration Plan Be A Big Win For Wal-Mart?
- Netflix, Inc. Heads to the Land Down Under
- Why This Black Friday Is So Important For Wal-Mart