How Credit Cards Work
/Credit Cards
First Published Date: January 11, 2009
With the amount of talking that is done about credit cards, very little pertains to the actual details of how they work, how they should be used, and the different kinds of cards available. It is known more or less by everyone that when a person is in a lot of personal debt they tend to owe large amounts on credit cards – what are less widely known is how this situation comes about, how to avoid it and how a borrower can use a card to their advantage.
As short a description of how credit cards work as possible, first. A customer looking for greater spending power enters into an agreement with a bank, where the bank issues a card allowing a certain amount of spending (a credit limit). Any purchases made go on the balance of the card, against which a payment must be made every month. Should the balance reach or exceed the credit limit, no further spending will be possible until a payment is made to bring the customer in line with the agreement.
Debt problems with credit cards occur when a customer borrows beyond their means or their circumstances change. In theory, the bank will not lend an amount that the customer will not be able to pay back. However, the checks put in place to prevent this happening are not foolproof, and circumstances are always liable to change. A credit agreement is given based on a customer’s earnings, but should they suddenly lose their job they may find themselves unable to make full payments to their card. For this reason, it is wise to have some savings should you take out a credit card.
There are now more choices than ever for a customer looking to take out a credit card – these different options take into account the varying circumstances and needs of customers. A popular type of card is the low-interest/no interest credit card, which allows the customer to borrow money for a large purchase and then use a “zero interest” period to pay off the balance over the course of a number of months.
Interest-free periods when they were first introduced tended to last three months, but as banks compete for an increasingly crowded market it is becoming the norm for banks to offer as long as a year interest-free. When this period is ending, a customer will often transfer the balance to a new card. If done assiduously, this can see the customer avoiding having to make a payment for years at a time.
Other cards take account of the spending habits of the customer by offering cash back on purchases, Air Miles when the card is used in certain locations, and reward points for frequent use. A recent innovation making it possible for the customer to use plastic even when they find credit hard to come by, the Secured Credit Card allows the customer to “load” money on to their card and use it like a bank account – meaning they never spend money they do not have. These cards also enable the customer to build a good credit rating through regular loading.
To streamline and minimize blog maintenance, I will be discontinuing maintaining the Canadapersonalfinancewebsite.com website (however, I will still hold the domain). I will gradually move all articles from this site to A Dawn Journal. This article originally published on the above website on Jan 11, 2009
