Credit Card Basics and Savings Tips

Our society depends so much on credit, setting a monthly budget just doesn't seem to matter anymore. Having the luxury of an easy and hassle-free spending alternative makes it too easy to buy the things we want, without saving for them. Credit cards can make shopping easy. But hassle-free? No way.

Children often say that credit cards are a source of free money. It's charming, but we know better. For a tiny piece of plastic, the credit card sure wields a lot of power over most people in industrialized societies. It acts like a tiny bank loan in our pockets, and allows people to make impulse purchases without having the cash in hand. It makes buying a lot easier in the short term. Of course, the hard part involves paying back the "loan" before the interest begins compounding.

Credit cards are getting easier to obtain, too, and the process involves submitting an application that acts as an agreement between you and your credit supplier. If they approve of your application, you will shortly receive your card in the mail. The supplier will set a pre-determined limit on how much you may borrow at a time, and up to that limit, you can purchase goods or access cash from their "bank." Most credit card firms place a limit on your monthly spending.

On the back of your credit card is a black strip that is encoded with secure information about the card and about you. During a transaction at a retail store, the machine at the cash register will read the information on the strip and communicate with the headquarters of the credit card supplier. Your payment status will determine whether the supplier will authorize the current transaction. There are millions of places that accept credit cards in person, and many more that accept cards by telephone or on the web. You can also use your card to withdraw cash from ATM machines that accept your particular card type.

There are many credit card suppliers, but seven of them represent the bulk of the industry. VISA and MasterCard are the two dominant players, as well as American Express, Citi, Discover, Diners Club, and JCB. Don't be fooled by the fact that many banks or other organizations arrange partnerships with the big credit card suppliers to create branded cards that have the logo of both companies.

When you make a purchase in a physical store, you are generally asked to "swipe" the card by sliding the magnetic strip through a card strip reader. When you purchase online, you will be asked to provide your credit card details on the web site itself. Be certain to check for the secure lock image in the bottom right corner of your browser before you purchase online, as there are some unscrupulous operators online, as in all parts of life. Once your puchase is approved, your credit card supplier will mail you a bill for your purchase. You can either make a partial payment, or preferably, pay the full amount of your purchases for the previous month. If you do pay the bill in full, on time, you will not be charged interest.

Here's where credit cards can be difficult. If you opt for making a partial payment of simply meeting your minimum obligation, you will be charged interest. If you have made numerous purchases or used credit to buy expensive items, the interest can add up very quickly. This is how the credit card suppliers make their money. Late fees can also be charged, so be sure to make your payment on time.

There are definitely convenience factors attached to carrying a credit card. However, the convenience must be balanced against the high interest rates, and potential for making purchases we do not really need, but rather merely desire in the heat of the moment. The best advice is to pay your monthly card bill off in full every month, even if it is hard to do. Thus you will have all the convenience of using the card, without the pain of the high interest rates.

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Robert Jonsonn contributes to several web sites, on health products and consumer protection themes.
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