Credit cards

A credit card allows its holder to pay for goods and services, and most credit cards will also give the holder the option of making a cash withdrawal. The issuer of a credit card sets up an account for the credit card holder and grants the holder a line of credit. The holder can be an individual, a company, an organization or certain other forms of legal entities.

A credit card is similar to a charge card, since both are tied to a line of credit. With a charge card, the balance must be paid in full each month. With a credit card, you only have to make a certain minimal payment and can elect to let the rest of the debt remain until later. N.B! Credit cards and charge cards are available with a variety of terms and conditions, so it is important to always check which rules that apply to your specific card. You may for instance have a charge card where you only have to settle your debt every other month rather than once a month.

What’s good about them?

Interest-free credit – if you pay on time

Many credit cards will give their user access to 30 days of interest free credits, and some cards offer even more than this (55 days of interest free credit is not unheard of). It is important to be careful though, because once your interest free days are over, the interest rate can be very high. It is important to pay the bill in full on the maturity date of the debt, otherwise the free credit will turn into an expensive credit.

Even if you dislike borrowing money, having a credit card as a back-up for emergencies can be a good idea. If something unexpected happens, the credit offered by a credit card is usually much more beneficial than credit obtained through a payday loan, an SMS-loans or similar short-term credits. Of course, having money in a savings account to handle emergencies is even better.

Repayment flexibility

With a credit card, you will typically have two choices when the bill comes:

• Pay the bill in full to avoid being charged interest
• Pay part of the bill (the minimal requirement or more) and leave the rest of the debt until later.

Option #2 can help tie you over periods of economic distress. If you for instance have a large dental bill to pay this month, you can opt for #2. This way, you don’t have to chose between paying your dental bill or paying your electricity bill. You can pay both, and pay your credit card bill in full next month instead. Using a credit card this way is often cheaper than not paying the electricity bill, because if you don’t pay your electricity bill on time you may end up having to pay late fees and collection agency fees on it, or even having it impact your credit score.

Extra consumer protection

Many credit card companies give their customers extra consumer protection for purchases made with the credit card. You may for instance get travel insurance when you pay your trip with your credit card or receive insurance against online fraud when you order an item online and charge it to your credit card.

Check with your credit card issuer to find out more about travel insurance, car rental insurance, common carrier accident protection, enhanced warranties, damage coverage on new purchases, and other perks that you may be entitled to.

Tracking expenses

Using your credit card for most purchases is a convenient way of tracking expenses. The monthly bill will make it easy for you to monitor your expenditures and see exactly what you spend money on and where you may be able to make cuts if needed. The monthly bills can also come in handy for issues regarding taxation and reimbursement.

Loyalty programs / Reward schemes

Some credit cards have loyalty programs (reward schemes) where you benefits increases the more you spend with your credit card. Purchases (but normally not cash withdrawals) will give you points, and these points can be redeemed for cash, gift certificates, products or services, or entitle you to certain advantages such as a longer than normal grace period.

What’s bad about them?

Credit card fraud

Credit card fraud is a large problem world wide.

Credit Cards is a cheaper form of short term credit than most people realize. A survey done by smslån.org shows that credit cards often are more than 50% cheaper to use than payday loans. They found credit cards to be cheaper in all surveyed countries (Sweden, Netherlands and the US)

To safeguard the consumer from the possibly devastating consequences of credit card fraud, many jurisdictions have laws that limit the amount for which a consumer can be held liable for fraudulent transactions. Examples of such jurisdictions are the United Kingdom, the United States and France.

Also, to ensure the continuous popularity of credit cards, many credit card companies will remove fraudulent charges from the credit card bill when alerted by the credit cardholder, provided that the holder has not been reckless with their credit card or credit card information.

Over-spending

Some consumers are prone to over-spending when they have access to a line of credit. This problem is not unique to credit card users, but the popularity of credit cards have made them a bit of a poster child for the issue.

ATM fees etc

Many credit cards will charge the user a fixed fee or a percentage based commission when used to withdraw money from an ATM. This makes them an expensive alternative to traditional ATM cards. There are also credit card issuers that will charge interest on cash withdraws from the date of the withdrawal rather than from the monthly billing date. You may be charged a fee / commission / interest rate even if the ATM belongs to the company that issued the credit card.

If you do no pay back your credit card debt in full, the credit card company may use your payment to cover purchases and not the cash withdrawal, even in cases where the purchased are made after the cash withdraw.

Annual fee

Even if you pay your debts in full each month (thereby avoiding interest rates), having a credit card is usually not for free. Most issuer will charge you a yearly credit card fee, although there are exceptions.

Interest rate

Most credit cards will not charge you any interest rate on purchases as long as you pay your bill in full every month. If you do not pay your bill in full, you will be charged an interest on the remaining debt and this interest rate can be high.

Always make sure that you know how large the interest rate is for your credit card. By knowing this, you can make an informed decision when it is time to pay the monthly credit card bill.

Keep in mind that if you do not pay your monthly bill in full, most credit card companies will charge you interest from the date of each purchase – not from the due date of the credit card bill. It is also important to know that the interest rate on credit card debt can increase significantly if you fail to make minimal payments each month, or if you default on any other credit with any other lender that reports your default.