Credit cards are one of the most popular forms of payment in the United States. Their popularity has led them to not only be accepted in stores, but through online merchants and smart phone applications. Therefore, it is time to take a deeper look at how credit cards work for their issuers and consumers.
All credit cards come in the same shape and size. There is a magnetic stripe on the back of each one that contains three tracks of data. Within these three strips are a consumer’s full name, the card’s number, expiration date, credit limit, and its zip code.
The credit card is issued to the consumer by a financial institution who decides how much credit the consumer may borrow. The maximum amount or credit limit is based on the consumer’s credit score and credit history when it comes to an unsecured credit card. A secured credit card is issued to the consumer after they make a deposit to the financial institution which dictates the card’s credit limit.
How it works
The financial institution charges interest for the money borrowed on the credit card. The interest charges begin one month after the initial usage, unless otherwise stated.
The interest to be paid on the money borrowed for purchases is called the annual percentage rate (APR). There is not a federal law that limits the interest rate financial institutions may charge for a credit card. However, many states enforce interest rate ceilings for the financial institutions within their borders.
Credit cards allow consumers to repeatedly make purchases as long as they are within the card’s credit limit. Most stores accept credit cards as a means of payment as merchants are paid instantly by the card’s financial institution.
Credit cards are a great substitute to avoid having to carry cash. Many of them will allow consumers to get cash advances through automated teller machines (ATM) if cash is needed.
Some credit card issuers offer rewards for certain usage amounts where consumers can earn cash back, discounts, or other freebies. Also, some issuers even offer zero percent interest rates for a certain time period on purchases made with the card.
No matter which credit card a consumer gets, they should take the time to make sure it is the right card for them. They must be aware that all cards may be subject to fees and should read the card’s terms of agreement to learn about them.