Credit Card Basics

Credit Card Basics from Consumer Credit Counseling Service of Rochester

All credit cards have costs associated with them: interest fees, annual fees, cash advancement fees, transaction fees, late fees, and over-limit fees. Keep this in mind when weighing the convenience and benefits of credit. There are different types of credit cards. The following is a summary of each one.

Credit cards

Most credit cards are revolving and unsecured, meaning the balance does not have to be paid off in 30 days and there is no collateral against the purchases you make. Making a purchase with a credit card is the equivalent of taking out a loan. For consumers, credit cards are a convenient way to make purchases without carrying cash or checks. For lenders, credit cards represent a very profitable lending service. Most credit card lenders charge a variety of fees for the use of their cards - annual fees, late payment fees, balance transfer fees - and all charge interest on unpaid balances. The lender will decide based on your credit history what your spending limit will be. Merchants that accept payment by credit card pay the lender a small percentage of each sale.

Credit cards issued by department stores and clothing retailers often have higher interest rates than bank-issued credit cards. Some offer low introductory rates and payment-free periods, but the interest rate may be dramatically increased after the introductory period is over. If you use a store-specific card, pay down the balance quickly to avoid large interest charges.

Charge cards

Charge cards, such as American Express, are also unsecured but they are not revolving, which requires cardholders to pay their balances in full every billing period. Many store-specific cards are actually charge cards. There is usually an annual fee, and failure to pay the balance by the due date can result in fines, penalties, and a negative credit report.

Secured credit cards

These cards require you to deposit an amount of money into a savings account at the bank as collateral. If you don't make the agreed payments, the bank has the right to take the funds you have deposited as collateral. Secured cards are typically obtained by those trying to establish or reestablish their credit.  You can obtain a secured card at most local banks or credit unions.

Debit Cards

When you use a debit card, the purchase amount is deducted directly from your bank account. You must have the money available in your bank account to cover the full transaction amount at the time of purchase. There is no interest charged because there is no credit advanced. Transactions appear on your bank statement, so you can easily track your spending. Debit cards are convenient, safe, and great for travel. They are more widely accepted than checks and can be used almost everywhere that credit cards are accepted. You can withdraw cash from your account at most automatic teller machines (ATMs). There may be monthly or per-transaction fees. Carefully review your cardholder agreement. A fee is charged for cash withdrawals from most ATMs.  Many people think debit cards establish credit.  However, debit card activity is not reported to credit reporting agencies. 

 

 

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