How do credit cards work?

credit cardsCredit cards are a convenient and largely secure payment method that allows borrowers to purchase goods and services as well as make cash withdrawals, up to a pre-determined allocated limit. Credit cards are issued by banks, finance companies, stores as well as vendors like wholesale clubs and online merchants, among others. With so many credit card companies in the fray, it is essential to do some research, and find the best terms and conditions available for you.

Let the FREE credit card finder do all the hard work and find the credit card that works best for you!

Essentially, a credit card company gives you a short-term loan at a relatively high interest rate. You receive transaction statements every month and have a certain amount of time to pay your debt off. If you pay your balance in full, you will not be charged any interest. If used correctly, credit cards are the cheapest form of borrowing money one can find.

Advantages and Disadvantages of Having a Credit Card

According to the U.S. Census Bureau, there will be 160 million cardholders in the United States by 2012.

Given the popularity of credit cards, it is important to learn how credit cards can help and harm your financial present and future.

Some of the major advantages of credit cards are as follows:

  • Credit cards allow you the ease of making purchases without carrying cash with you at all times.
  • Credit cards extend free short-term loans as long as you can pay off your balance at the end of the transaction period.
  • Most credit cards are true global currencies. They can be used anywhere in the world, as long as the vendor accepts credit cards. It must be noted that most international transactions might carry some fees.
  • Credit cards allow you to make purchases online in a secure fashion.
  • Most credit card companies protect you against fraudulent charges.
  • Most credit card companies offer many forms of incentives and rewards. This includes bonus points per dollar spent, airline miles, restaurant and hotel credits, cash-back, among a multitude of other perks.

Some of the major disadvantages of credit cards are as follows:

  • Credit card companies are effectively lenders of short-term high interest loans. If you are unable to clear your balance at the end of the month, you will incur an interest on your debt. This can pile up very fast.
  • Credit card companies are being very cautious with extending credit in the present rough economic times. So it might be hard for you to get a credit card if your credit scores are low or if you have no credit history.
  • Credit card companies place credit limits on your credit card so you might not get as much credit as you expected or need.
  • Most importantly, if you are unable to pay off your balance or miss payments, your credit card company has the right to hike your interest rate as well as slap on late fees on your account.
  • Credit cards might not be accepted at all vendors. In some cases, the vendor might charge you a transaction fee to use your credit card.
  • Credit card accounts are also vulnerable to hacking, which could put your credit and bank information into unscrupulous hands.

credit cardsHow Credit Cards are Issued

When you apply for a credit card, the credit card companies look at markers such as your credit scores, present employment and employment history, your outstanding debts among others. Based on these factors, your credit card application will be denied or your credit card company will extend your credit with a preset credit limit.

My Credit Score

According to myFICO, every consumer has three FICO scores. Given by three different credit bureaus, Experian, TransUnion, and Equifax, FICO or credit scores are based on the following factors:

  • Your payment history
  • Your debt-to-income ratio
  • Your revolving balance
  • Past missed and late payments
  • Reports to debt collection agencies
  • Your employment record, among others

Your FICO scores determine your creditworthiness, which is used to set your credit card APR and credit limit by credit card companies. Additionally, your FICO scores are used to set interest rates for all your loans, from credit cards to auto loans, mortgages, and even insurance rates.

Given the importance of credit scores in your financial life, it is important to learn how to use your credit card carefully. You should get a credit card with the lowest APR possible, low or no annual fees, and minimal transaction fees. Most importantly, use your credit card sensibly and try to pay off your balance at the end of the month.

Finding the Best Credit Card for Me

The credit card market is littered with credit issuers, who are seeking your business. Depending on your credit scores and your requirements, there are a bewildering numbers of offers available.

Always remember to thoroughly research the credit card company, and the terms and conditions they are offering before signing off on any agreement.

Fortunately, you can get a variety of credit card offers using the FREE credit card chaser tool to find the best credit card that matches your unique needs!


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Disclaimer: This content is not provided or commissioned by American Express, Visa, MasterCard, Discover, or any other credit card company or issuer. The opinions expressed here are the author's alone, not those of any credit card company or issuer, and have not been reviewed, approved or otherwise endorsed by any credit card company or issuer. Credit Card Chaser may be compensated through various affiliate programs with advertisers. As always, Credit Card Chaser is an independent website commmitted to helping people research credit card offers and find the best credit card!