Credit Cards are a means of purchasing items and paying for them gradually, using a third party to borrow the funds from. Credit cards are a very useful tool if used properly. However, they are fast acquiring a bad reputation because of their prominent involvement in accumulating large amounts of debt. Credit cards, in themselves, are not bad. Unfortunately, to be able to use a credit card as it was first intended, a person must practice rather rigid self-control in utilizing the card for purchases. History shows us that it is all too easy to live above our means.
During the mid to late 1920's, the United States was then in the era that is now known as the "Roaring Twenties." During this time, big-name gangsters and the mob came into prominence largely because of the prohibition. Illegalities were certainly not uncommon during the twenties, nor were they especially looked down upon by the majority of the populace of the United States. Many people broke the Prohibition Laws of that time by frequenting "speak easies" and other places that illegally sold alcohol. With these illegal actions came great expense. Since the famous gangster Al Capone had a virtual strangle-hold on the illegal alcohol market, he could set prices pretty much where he wanted them. For Americans that were already addicted to the substance, this became disastrous for their financial state of affairs.
Another factor that contributed to the great amount of debt many Americans accumulated during this time is the general lifestyle of the time. Those that were considered to be worth meeting in social circles were expected to throw lavish parties and dress in the latest styles, whether they could afford it or not. As expenses rose, so did the amount of speculation that was going on in the stock market at the time. Many put all of their financial assets into the stock market in the hope that it would bring a return as great as had been coming back to them for the past decade. Sadly, the stock market crash of 1929, known to the world as Black Thursday, occurred. This economic disaster caused many of the formerly wealthy Americans to lose everything that they owned. Many moved all over the country in an attempt to escape the poverty and trouble of their home towns. However, they soon found that jobs were few and far between and that the road to recovery would be long and hard.
Most historians agree that an indirect cause of the depression was the way that many Americans handled their finances during the previous decade. Because most of those that were in debt could not pay back what they owed, this put the economy in even worse shape than what it was.
Though credit cards are very useful for emergency situations and other absolute necessities, it is best not to use them on an every day basis unless the user has a very strong sense of self-control and would not use the card to live above his or her means.
One of the advantages of using a credit card over a debit card is the way in which your finances are protected. When using a debit card, if a users PIN number is stolen and the card is used by the thief, it can be very difficult to regain the money that the user lost during the theft. If a problem such as this one occurs for a credit card user, the user must simply inform the company within a certain time frame. Usually the user is not held accountable at all for the identity theft, but if the user fails to report the theft within the allotted time frame, the company usually charges a fairly small amount for the infraction.
The downside of credit cards occurs when people start carrying a balance. The interest charged on the balance carried is the primary way that credit card companies make money. Most states have usury laws that cap that make it illegal to charge over a certain percentage of interest. However, credit card companies are exempt from those laws. As a result credit cards are one of the most expensive ways to borrow money.
Normally when someone is trying to get out of debt, paying off the credit card with the highest interest rate first is their first step. The Debt Snowball takes a different approach based on getting more psychological momentum.
A credit card is a financial instrument designed to provide easy access to a line of credit from a financial institution. Credit cards are physically plastic or metal cards encoded with an account number. Merchants have machines that read this account number and enter a transaction against that account over a phone line or data network. Credit cards are usually a form of unsecured debt.
The value of the transaction is paid to the merchant on a daily basis. Merchants pay a transaction fee for this service. The transaction fee is usually 1% to 4%. From the merchant standpoint they are able to sell to a vast number of consumers without holding the loan themselves. The merchant doesn't have to bother with delinquent accounts, debt collection or sending out invoices. Customers get the advantage of applying for credit with a single institution that can be used almost anywhere. Banks that issue credit cards enjoy a high rate of interest on balances that are paid off by the end of the month. They also make money off the transaction fee every time the card is used.
Dangers of credit cards
Many people who are trying to live debt free are very critical of credit cards. Credit cards make it easy to spend more money than what you have. Unlike checks or debit cards there is no legal penalty for spending more than you can pay. If you have trouble with disciplined spending, you should probably avoid credit cards. On the other hand if you can treat a credit card like you would a checkbook, credit cards offer some advantages.
Advantages of credit cards
Credit cards have advantages over cash and checks when it comes to fraud and record-keeping. With a credit card transaction the money is not taken out of your account until you pay the bill at the end of the month. Debit card transactions remove the cash as soon as it is processed. If you are the victim of fraud, credit cards required that you explain why you shouldn't have to pay the money while a debit card requires that you present a case as to why you should get your money back.
One debit card user had a fast food chain had accidentally add three zeros to their transaction. Instead of removing nine dollars from her account the restaurant removed $9000. She was able to eventually get the money back, but it required much more effort on her part that it would've with a credit card. Worse still while she was negotiating with the bank and fast food chain, that money was not available for other uses. If the money was set aside for paying college tuition, the down payment on a house, or buying a new car, it could have left her in a severely distressed financial position.
Credit Card Brands
There are quite a few different types of credit cards. Each has its own particular market and way of doing things. Below is a list of some the major types of credit cards along with some thoughts about how they differ from others.
American Express actually started out as a mail delivery service. They started offering some type of charge cards in 1946. After seeing the success of diners club cards that were launched in 1950 American Express started ramping up their credit card business.
One thing that's different about American Express from many of the other credit card companies is that American Express charges a yearly fee. The yearly fee helps cover a number of different services that typically aren't available on other credit cards areas for example the platinum credit card comes with concierge service and roadside assistance. However many other credit card companies have started offering some of these services so it's best to compare offerings carefully.
Many merchants do not take American Express. They tend to charge slightly higher fees than other companies and many small businesses don't want to deal with yet another credit card processing company.
MasterCard is one of the most common credit cards you'll see. Unlike American Express, MasterCard is actually the company that handles processing the transactions. Banks issue the master card and are responsible for taking on the risk associated with borrowers defaulting.
Visa, like MasterCard, is a payment processing company that works in much the same way. You can trace the history of visa back to the Bank of America in 1958. Their marketing technique was interesting. They mailed out unsolicited credit cards to consumers they felt would make good customers. These consumers didn't even sign up for the credit card basically received one in the mail. This led to a great number of people defaulting on the money owed because they didn't fully understand what they were getting into using it.
In 1975 the credit card processing operation was put under the name visa and in 2008 the company launched an IPO and sold over 400 million shares on the stock market.
Discover card was originally issued by the Sears store in 1985. Like American Express most of the credit behind the credit card is offered by Discover Bank company–not another entity.
Diners club cards were actually one of the first credit cards available. In the early days they operated as charge cards were the balance was expected to be paid off each month. In 2008 Discover financial services purchased diners club.
JCB stands for Japan credit bureau. It was founded in 1961 and is not widely accepted in the United States. It is accepted then some businesses that are tied to Japanese tourism in United States such as airline's car rentals and some department stores. There is the United States arm of JCB but the cards are only available to residents of California Connecticut Illinois Nevada New York New Jersey Oregon Washington and Hawaii.
In 2006 JCB signed an agreement with Discover in order to help cross process their cards to get wider acceptance.
Frequently Asked Questions About Credit Cards
- What is the difference between a credit card and a charge card?
- A credit card gives you access to credit where you aren't required to pay the entire balance each month. A charge card simply lets you pay for all of your purchases at the end of the month. American Express was a charge card until recently, but now they offer many (if not most) customer credit card capabilities where the entire balance doesn't have to be paid off each month.
- How do credit card companies make money?
- Interest rates on credit card balances are very very high. In fact, the rates are so high that in most states they would be illegal under usury laws if it weren't for special rules that exempt credit card companies from usury laws.
- How do credit card companies make money if you pay off your balance each month?
- Even if you don't carry a balance, credit card companies make money of each of your transactions. Merchants pay a fee in order to accept credit cards. So if you purchase an item for $100, the merchant may only get $96 to $98 from the credit card company. Credit card companies tell merchants that this is a reasonable fee because most people will buy more with a credit card than with cash.
- If someone steals my credit card, am I liable for all of their charges?
- If you report the theft to the credit card company in a reasonable amount of time you are not liable for the charges. Even if you don't report the theft, you are only liable for the first $50. Most of the time, credit card companies will notice a different purchase pattern and contact you if something looks odd.