How Credit Cards Work
Credit cards have become a major financial industry, uniting
cultures with a common form of payment and allowing purchases to
be made on credit so that individuals have additional options
when they're short on cash.
Unfortunately, many people see credit cards as simply a way to
spend more money than they have... this isn't what credit cards
are designed to do, and this disregard for their purpose can
lead to credit problems and even bankruptcy if left unchecked.
Of course, some people end up abusing credit cards simply
because they don't fully understand how the cards work. When
dealing with credit, however, a lack of understanding can end up
being quite costly in the long run.
To help correct this, below you'll find some basic information
on what credit cards are, how they work, and what uses they are
and aren't intended for.
What They Are
One of the biggest questions that individuals tend to have about
credit cards pertains to exactly what the cards are. Are they
issued by banks, or by corporations? Are they a type of bank
account, or something else entirely? These questions can seem
especially confusing when you hear about the companies that
offer the cards, but then see those companies' cards being
issued by local banks.
To make matters a bit more confusing (at least at first), credit
cards are a little bit of all of the options. For the most part,
they are issued by banks... however, the banks are given the
chance to issue them by the corporations that created the cards
or in some cases, the banks are actually owned by the
corporation.
Once the card is issued, there is a type of bank account
involved... the account that is associated with the card is
actually a type of loan instead of a standard bank account,
however.
How They Work
A special account known as a credit line is created by the bank,
and it works as somewhat of an inverse chequing account...
instead of depositing money into the account and writing cheques
to decrease the available balance, the credit line balance
begins at zero and with each usage the balance is increased.
This balance must then be repaid, as the usage of the card is
simply a temporary loan that's issued by the bank.
It should also be noted that there are an increasing number of
debit cards and cheque cards that are being used worldwide, and
that while they bear the same company logos as credit cards and
are processed the same way, they are different in that they
don't use a credit line... instead, they simply draw funds from
the chequing account that they are linked to as though the user
had actually written a cheque.
How They Should Be Used
Great care should be exercised when using credit cards, simply
because it can be so easy to get into debt with them... after
all, the card will allow you to charge up to its credit limit
whether you have the ability to repay the charges or not.
Instead of simply charging everything to your credit cards, you
should reserve them for special purchases or for specific types
of purchases.
Credit cards should be used as additional resources to get the
things that you want or need, not as free money.
Make sure that when you do use your card you can afford to make
the payments for the purchase... and keep in mind that the
longer you keep a balance, the more interest you'll accrue and
the more expensive your purchase will become.
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