It's hard to imagine doing business today without credit cards. If you are among the relatively few who do not own a credit card, the chances are good that you have a great deal of difficulty rent a car or reserving a hotel room. So, just what are these little plastic cards and how do they work? Let's start by explaining the basics.
What is a Credit Card?
The dictionary defines a credit card as
'A card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company which in due course is reimbursed by the credit card holder who will be charged interest at the end of the credit period if money is still owing.'
In other words, whatever you charge to your credit account has to be paid back within the credit cycle or an interest amount will be applied to the remaining balance.
Advantages and Disadvantages of Credit Cards
The obvious advantage to using a credit card is that it allows you to purchase some goods or services that you may not be able to pay for immediately. The credit cycle is usually about 30 days, and if the money is paid in that amount of time, there is no interest attached to the money borrowed. This sounds good in theory, but the bottom line is that most Americans don't pay off their balances on a monthly basis. This is where some of the disadvantages come into play.
Any amount that isn't paid off within the time of the monthly cycle will be subjected to an interest charge. Depending upon the rate charged by the specific card issuer, that interest rate can be huge. On top of that, many people will continue to charge things to their card and the balance and interest just continues to grow until they have no hope of ever paying the card off if they just make the minimum required payment.
Chances are that every few days you get a pre-approved credit card application with your name on it. Sounds easy, doesn't it? Well, read the fine...
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