Credit Cards and You

A Credit Article Contributed by Brook Yu

What is a Credit Card?

A credit card is issued to an individual with approval from the provider. The card is used at merchants accepting the credit card and credit is extended to the individual who promises to pay back the cost of the purchase. Usually credit cards have a general bank backing them, but sometimes a bank is created to issue its own brand of credit card (for instance American Express Centurion Bank).

Each month the user of the card is sent a statement which is payable through the mail, over the phone, and most recently, on the internet. Upon receiving the bill, the credit card user is obligated to pay at least a minimum portion of the balance on the credit card and can pay up to the entire amount of the card. If there is a balance remaining on the card after the monthly payment, this balance then accrues interest at a rate much higher than most other forms of debt.

Usually, if one pays the credit card back in full each month interest is waived allowing the credit card to act as a type of revolving credit. Credit card interest is a lucrative way for the credit card provider to make profits, but they also create profit for themselves by charging merchant fees each time a credit card is used.

What Kinds of Credit Cards are There?

There are numerous companies that provide credit cards and issue them under various terms and conditions. Aside from different businesses issuing credit cards, there are specific types of cards that demand different ways of payment. Secure credit cards are a special kind of credit card in which you must first pay a deposit toward the credit limit of the card. Usually the deposit is somewhere between 100% and 150% of the amount of credit desired.

This is especially useful for people who have a history of bad credit because this allows them to rebuild their credit through on-time monthly payments and by respecting the limit of the card. If a person were to default on payment of a secure credit card, the money owed is taken out of the original deposit the person has put down. Also, there are credit cards such as some provided by American Express that requires that the balance in full is paid back by the holder of the card each month.

Several major companies provide cards including American Express, BankCard, Diners Club, Discover Card, JCB, MasterCard, and Visa. Some merchants may decline to take some credit cards because of different rates charged to them.

How Secure are Credit Cards?

Although credit card systems are relatively secure, there are many avenues for fraud. There are ways to protect oneself against fraud as well as several improvements that are being introduced to credit card networks that will help eliminate excess fraud. A 3-4 digit code is now on the back of credit cards for transactions done where the card is not present at time of transaction.

Some merchants are requesting that a Personal Identification Number (PIN) which is only known by the card-holder. There are also "smart cards" on the market which are supposed to make forgery more difficult than it is now.