Credit cards have changed the world of personal finance. Since they were first introduced back in 1951, they have quickly grown to become the most common form of payment for most people. This ultimately changes how personal finances are managed.
Many people no longer wait until the check is in the bank before they make a purchase. Instead, they used the credit card and pay for it now. In many cases, people are seemingly unaware that the money they spend when using a credit card does not belong to them. They're actually borrowing money from a financial institution that issued them the credit card in the first place. This transaction represents a line of revolving credit.
Each time you make a credit card purchase you are borrowing against your line of credit or principal. The credit card issuer will charge the borrower a finance charge, which is essentially interest that accumulates overtime on the unpaid balance or principal. For example, a credit card with an annual percentage rate of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance, the borrowers monthly finance charge would be $7.50.
Credit card companies make money in a number of ways. First, they charge the merchant that processes borrowers' card. That merchant pays for the privilege of being able to access the borrowers' money through a third party. The credit card company may also charge a borrower a number of fees. By law, credit card companies must disclose all fees to a borrower prior to opening the account. Most fees include some variation of the following fees:
- Annual Percentage Rate (APR)
- Annual fees
- Late fees
- Cash advance fees
- Balance transfer fees
- Over the credit limit fee
- Setup fee
- Return item fee
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Types of Credit Cards
Most credit card companies offer several kinds of cards. Typically, your credit history and income levels will determine the type of card you get. The most common credit card types include:
Regular cards
Regular credit cards do not require a security deposit and generally have very few features. Most regular cards have higher credit limits than secured cards but lower credit limits than premium cards.
Premium cards
Premium credit cards are usually referred to as gold, platinum or titanium cards. These credit cards offer higher credit limits and usually have lots of extra features and benefits. For example, premium cards often have travel insurance, emergency services or even product warranties.
Secured credit cards
A secured credit card means that the card is linked to the savings account of the cardholder as a pledge to the bank that issues the card. There needs to be enough money in the savings account to cover any purchases made with the card. If the monthly payments are not made the secured credit card issuer can take the money from the holder's savings account, and the savings are frozen until the balance of the card is paid off. If borrower pays what is due on a secured credit card on a regular basis, after a certain period of time, the secured credit card can be converted into a normal credit card.
People who have never had a credit card or have very poor credit may get a secured credit card to help build or repair a poor credit history. People who are in this position should strongly consider this option.