Credit cards are a convenient financial tool for many people, and they can come in handy in times of financial crisis. If they're not used responsibly, however, credit cards can cause serious financial problems for people. Knowing about credit cards and how they work can help ensure that your credit cards are part of a healthy financial life.
Types
There are four basic types of credit cards. Bank cards (like Visa and MasterCard) come with a determined credit line based on your credit report and financial history and can be used for purchases and cash withdrawals. There is a great deal of variety in bank cards when it comes to annual fees, interest rates and other options; so, shopping around is a good idea. Travel and entertainment cards (like American Express or Diners Club) usually require an annual fee and for their balance to be paid off in full every month. Travel and entertainment cards often offer free travel insurance, special discounts and other incentives. Retail store cards are credit cards that can only be used at a particular store or group of stores. Oil company cards are credit cards for use at a particular gas station or group of gas stations.
Benefits
Credit cards can be useful financial tools for a number of reasons. When you use a credit card, you can make purchases without having to carry a large sum of cash. Many retailers accept credit cards but not personal checks, and most bank credit cards can be used in other countries as well as in the United States, making them convenient for travelers. Credit cards can also provide a short-term cash flow improvement if you run into financial trouble.
Risks
Buying things on your credit card can end up being more expensive when you total up the monthly interest rates for balances that aren't paid off in the month they're incurred. It can also be hard to think of credit cards as "real money," which may make you inclined to spend more than you can afford.
Considerations
If you're considering a credit card, there are several different factors that you should examine as you're comparing cards. Find out about the card's fees, which may include an annual fee or monthly maintenance fee. Understand the finance charges for your card---with any credit card, your bill includes a percentage of all the money you currently owe on the card added to your balance every month, so lower finance charges save you money. Be sure you understand the fees and implications associated with late payment, since in many cases even one late payment can significantly increase your monthly interest rate.
Warning
Credit card fraud, in which people obtain your credit card information and use it to make unauthorized purchases, is not uncommon. If you have a credit card, make sure to check your credit report once or twice a year to check for anything troubling, and take the time to go through your credit card statement every month to make sure all the information on it is correct.
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