Credit card
A credit card makes it easier and more convenient for a consumer to buy things, in three ways:
- cardholders do not need to carry cash;
- cardholders can buy things even if they do not have enough money in their bank account to pay for them;
- cardholders are protected against cheating by sellers.
Some predict that credit card will soon make paper and coin money obselete.But in exchange for this convenience, a credit card has costs and dangers.
Costs
- A purchase made on a credit card is a loan, and interest (called a "finance charge") is charged. The interest rate is very high; rates of 18% to 24% per year are not unusual. This is much higher than the rate on most consumer loans, like auto loans or mortgages. Because the interest rate is so high, the best "investment" most consumers can make is to pay off their credit card balances.
- Increasingly, credit cards charge "late fees" that can be very high. A consumer with a low balance who sends a payment in late may get hit with a $25 or $50 "late fee."
Dangers
- Credit cards are lucrative for banks because of the high interest rates. Therefore banks do not want consumers to pay off their balances. Credit card statements will show a "minimum payment" which must be met, but the minimum payment is very small. A consumer who takes the lazy way and only pays the "minimum payment" will run an increasing balance and run into debt.
- A consumer who pays cash will be forced to stop spending when the cash is gone; a consumer who writes checks will be forced to stop spending when there is no more money in the account. But credit cards make it very easy for cardholders to buy things, even if the cardholder really can't afford them.
As protection
If a consumer buys something with a credit card—for example, over the Internet—and the merchant doesn't send it, or it is not the way the merchant described it—the consumer has a great deal of protection.
If a complaint is made to the credit card company, the company will check the complaint and very frequently will issue a "chargeback" and take the item off the bill. It is important to complain right away and to have good records.
History
Credit cards were invented in the 1950s and became very popular in the 1960s. Before credit cards, travel was more difficult because travellers needed to carry money, purchase "travellers cheques," or make special arrangements in advance with banks in the cities they were travelling to. Mail order purchases were made by check, and were very slow, because most companies would wait for the check to clear before shipping the product.