What are Credit Cards

For good or bad, credit cards have become an integral part of our lives. For many people all over the world and mainly in the United States, Western Europe and Asia, living without a credit card is not possible at all. One might ask the question if credit cards are so addictive or so useful that they have become that important to our daily lives. Yes, credit cards are addictive and they certainly have many advantages. But before we go to the advantages and risks of credit cards, let's first see what credit cards are and how they work.

Credit cards first appeared in the 1920s but they became a widespread credit instrument in the 1960s. Credit cards are used in retail transaction settlements and essentially they are a form of loan because unlike debit cards, which require that you have the money you wish to pay at the shop available in your account, credit cards allow you to buy now and pay later. So, you get a credit from the issuer of the card (a bank, a financial institution, or another entity) and in return you pay interest for it.

You can spend money without having to carry cash and this is one of the indisputable advantages of credit cards but at the same time it is one of the biggest risk because you may have to pay for purchases that you have not actually made. Merchants also prefer credit cards to checks because checks can bounce and even if they don't there is generally a period (till the check is cashed) during which merchants can't get their money.

If there is something in common for all credit cards, this is their shape and size, which is specified by the ISO 7810 standard and which is followed by all credit card issuers in order to ensure compatibility with credit card readers (the devices, in which you put the plastic card in order to perform transactions with it). The general mechanism of how credit cards function is also similar, regardless of the issuer and if there are differences they are mainly in areas like interest rate, period for settling the payments, allowed limits, etc. So, let's see briefly what the mechanism of credit cards is.

First, credit cards are issued by banks and other financial institutions upon request (and after completing the paperwork and your credibility checks, of course) by you (the card holder) if you meet the conditions of the issuer. After your credit card is issued to you, you can use it to make payments at all locations where the credit cards of the issuer are accepted. In that relation it is important to have a credit card from a reputable issuer, otherwise you might pretty often get rejections to accept payment.

Then you start making purchases. The cashier checks if your credit card is valid and if you have enough money to pay within your limit. If this check is OK, you give your consent that you will pay the card issuer back the amount of money that will be withdrawn from your credit card. After that the cashier just marks that the goods have been paid for (by the issuer, you will pay them later), you take them, go home and in some time you pay your issuer back. You don't have to pay the issuer immediately because all credit cards have a grace period (10 days, 15 days, a month, and so on) as specified in the Card Holder Agreement you have signed when your card was issued.

Generally, you can spend money up to your pre-defined limit, though some issuers allow to spend over the limit but in this case the charges are so high that it can make your head spin when you receive your monthly statement. The (monthly) statement shows what has been purchased with your credit card and if you think that any of the charges are incorrect, you can dispute them.

Then, at specified intervals you repay your debt to the issuer. There are many variations here – for instance there are cards that make you pay the whole amount at the end of the month or a certain portion of it. There are even 0% interest rate credit cards but basically they have other downsides, as we will see later, when we examine the various types of credit cards.