Understanding credit cards (or charge cards)

A picture of a credit or charge card from Citigroup Inc.
A picture of a credit or charge card

A credit card offers an alternative to paying cash for buying an item or receiving a service. At the time of the sale, the card-holder has number of options to make the purchase. He can present his card to the seller, or swipes the card himself on a card reading machine, or enter the credit card information to a form in the case of online shopping. Once the credit card information is collected by the seller, it along with the total transaction price is sent to the credit card company for approval of the transaction. Depending on the availability of the card-holder’s credit, the transaction is approved. Consequently, he can take his purchased items home.

Although this process may seem to involve many steps, it actually is simple, fast and generally safe. What may not be realized in this process is that the card-holder by using his credit card is actually borrowing money from the credit-card company. This happens very fast and conveniently. In fact, credit cards are attractive to the consumers primarily because they provide a convenient way of paying for the purchases without giving a cent from their pockets.

Credit card bill — is what a credit card owner receives after using his card. The bill shows a record of all the transactions that occurred during a billing cycle (usually within last 25 days or so). This is what you can expect to find in a bill:

  • Your personal account information
  • credit card number
  • your name and address
  • your new balance. A positive balance indicates you owe the credit card company. Conversely, a negative balance means the credit card company owes you money.
  • Amount of minimum payment due
  • Payment due date
  • Credit limit (Total amount you can borrow)
  • Credit available (amount you have available for borrowing)
  • Cash credit limit (amount of cash available to you)
  • Previous balance
  • Payment and credits
  • Purchases
  • Balance and transfers
  • Finance charges
  • Any fees
  • Balance on credit rewards points
  • Summary of all the transactions
  • Instructions on how you can pay (typically online, by mail, or over the phone)
A credit card bill showing new balance
A credit card bill showing new balance

Out of all the items listed above, finance charges and any fees associated a credit account are probably of biggest concern. Think of the finance charges as the cost of borrowing money from the credit card company. Typically it is a very high percentage of the account balance.

A quick tip

It is highly recommended to check the billing statement of each credit card on monthly basis. Better yet if you have access to the online account, you may review your account more frequently. The idea is to make sure all the charges on your account are correct. Also, watch out for any fraudulent activities or charges. If you see incorrect charges, immediately notify your credit card company. Normally, you do not have to pay for any charges that you did not authorize but the credit card company must be notified of such charges as quickly as possible.

When the credit card owner receives the bill, it is not necessary that he only pay the minimum due amount. In fact, he should pay the full amount shown in the new balance on time to avoid future finance charges.

A quick tip

If you have many credit cards, it is difficult to keep track all of them without using an organized system. An easiest option is perhaps to write down all the account numbers and other account pertinent information. Remember to write down the phone numbers of each credit card company and the company name. Keep such information in a safe place. If your wallet or credit cards are stolen, you can use this information to contact the credit card company of the loss.

Let’s briefly comment on the advantages and disadvantages of the credit cards.

Advantages Disadvantages
  • Convenient and fast way of borrowing money
  • Expenses can be tracked easily (because of the transaction logged activity by the credit card company)
  • Helps build credit history
  • Credit card owner can easily get into debt if cards are not used responsibly
  • Risk of fraud and theft

How you use your credit cards can affect your credit ratings or credit history. Keeping a good credit history is very important because it largely dictates whether or not future purchases (especially large purchases such as car, house, or other loans) will be approved. In the US, there are three main organizations (Equifax, Experian, and Trans Union) that create a "credit score" or "credit rating" for you depending on how you pay bills, how many loans you take out, and other factors. Here are some recommended tips for keeping a good credit rating:

  • Pay all your bills on time.
  • Pay at least the minimum amount due each month.
  • Keep your credit card balances low.
  • Get a loan or a new credit card only when it is necessary. Having many credit cards and loans can negatively impact credit score.

How can I get a credit card? Getting a credit card is easy. Credit card companies use number of marketing techniques to attract new customers and it is hard to miss those attempts. Try searching online. Sears, Macy’s, and JcPenny offer department store credit cards. Typically, department cards can be used only in the department store. In other words, with a Macy’s card, for example, you cannot buy an item in a Sears store or vice versa.

If you are looking for a credit card that can be used at many different places, consider getting a credit card issued buy a bank. A bank issued card can be used at stores, restaurants, and gas stations to name a few retail places.

Posted on 8/21/2007
by Raj Singh