Credit Card Basics


How credit cards work

A credit card is a small piece of plastic with a lot of purchasing power. Banks and major retail chains issue credit cards to individuals. The company extends a line of credit (i.e., money available to borrow) that the card user draws from in order to purchase goods and services. At the end of each monthly billing cycle, the card user is billed by the issuing company and must repay at least the minumun payment (a fraction of the outstanding balance). Any outstanding balance remaining will accrue large amounts of monthly interest at a variable annual percentage rate (or APR). In short, credit cards allow us to purchase things whether or not we have the funds to pay for them in full—a potentially dangerous privilege.

Credit card payments and variations

All credit cards work essentially the same way and serve the same purpose, but differ in terms of interest rates, fees, penalties, rewards, and other benefits. Not all credit card offers are created equal, so make sure you’ve done your research and understand the conditions before you apply. Credit cards can be issued by retailers, such as Amazon or Banana Republic. Oftentimes, at checkout, the retailer will offer incentives for you to open a credit card account (e.g.,10% off your purchase). Keep in mind that store-branded credit cards are real credit cards with their own balances, terms, and conditions. You’ll need to pay them off the same way you do your regular credit card. Every year, billions of dollars of internet transactions are completed by use of credit cards. It is generally safe to use your credit card online, but make sure you trust the merchant and consider declining to store your card details.

So does all of this mean that you can apply for a credit card and finally go buy that big screen TV you’ve been drooling over? NO! As a student, your main goal through the use of a credit card is to establish credit history… not to finance unnecessary purchases. Since you will pay your bill in full each month, the interest rate shouldn’t matter—but make sure there is no annual fee. In the old days, people used to receive a paper statement and mail a check to the credit card company every month. Today, most people manage their credit card accounts online. You can sign up to have your card automatically paid in full via an auto-draft from your bank account on the due date each month.

What to do if you miss a payment

Log in to your account, make the payment, and call the customer service number on the back of the card immediately. If you have consistently paid on time in the past and your payment was fewer than 30 days late, explain that you are a reliable customer and just made a mistake. They may be willing to reverse the late fees and interest charges.

Pros and cons of using a credit card
Provides an opportunity to begin establishing good creditIf you fall behind on making payments, your credit score will be affected
Helpful in emergency situations when you don’t have cash or access to an ATMIf you are not careful, you may end up overspending and struggling to pay off your (growing) balance for years
Makes carrying large sums of cash unnecessaryThere are often high interest rates and annual fees
Usually provides rewards, such as airline miles, cash back (at least 1%), etc.It can be tempting to spend more than you have in order to meet reward limits
Enables you to make secure Internet purchasesAs soon as you go into credit card debt, you lose the ability to save for the future