Explanation of Buying with a Credit Card by Ron Kurtus - Personal Finances: Strategies in Handling Your Money. Key words: plastic, purchase, buy, debt, scan, signature, stolen, unauthorized use, limit, rating, payment, late fee, interest, balance, history, default, secured, bank, School for Champions. Copyright © Restrictions
Buying with a Credit Card
by Ron Kurtus (revised 26 November 2011)
A credit card is a plastic card that you can use to purchase items instead of paying in cash. The credit card company charges the store owner a small percentage fee for the service of facilitating purchases. You build up a debt on your purchases that you must pay off at a later date. Whatever amount you do not pay off at the end of the month, you are charged a fairly high interest rate. People who do not pay off their credit card debts can increase the amount of money owed rather rapidly. It is easy to get a card from banks, stores and other organizations, provided your credit history is acceptable.
Questions you may have include:
- What do credit card companies provide?
- What type of payments must be made?
- How do you get a credit card?
This lesson will answer those questions.
How it works
Having a credit card is a convenient way to purchase goods. You do not have to carry money, since most stores accept credit cards, as opposed to personal checks, which most stores do not accept. The store pays the credit card company 2% for the service.
Scans your card
When checking out with items you want to purchase, you or the clerk scans the credit card through a machine that automatically checks the validity of the card. A magnetic strip on the card provides the machine with information about the card. Some stores do not have this machine and simply make a copy of your card for later verification.
Your signature is supposed to be written in ink on the back of your credit card. You sign a receipt for your goods and the clerk is supposed to verify that your signature is the same as on the back of the card. Unfortunately, many clerks do not check the signature, making it easy for credit card thieves to purchase goods using a stolen card. Even if the signature is not exactly the same, seeing a person of the opposite sex of the name on the card might arouse suspicion.
If your credit card has been stolen or used without your permission, you must notify your credit-card company right away. Then you will be responsible for only the first $50 of unauthorized charges.
Since credit card purchases can even be made over the phone, it is possible for someone to have gotten your number and used to purchase goods on your account. Thus, it is always good to know where your card is and to keep all your receipts. You can check your receipts against your credit card bill to make sure you are being charged only for what you bought.
There is a limit to how much money you can charge with your credit card, according to your credit rating and ability to handle debt. Some people get around this limit by having several different credit cards. But that can get them in trouble with too much debt to handle.
The credit card company sends you a bill each month, summarizing your purchases and telling your minimum payment for the month. If you don't pay the minimum amount, you will receive a warning. If you still don't pay the minimum, your credit card is deactivated or turned off. You still have the debt to pay off.
You usually are given a grace period of about 25 days after receiving the bill to make your credit card payment. If you don't pay your bill by the due date, you will be charged a late fee of about $25.
Interest on balance
The amount remaining on your bill is charged between 15% and 25% interest. Since this is a very high interest rate, most people try to pay it off right away. In this manner, you can be using your credit card at no charge to you.
If your credit card company was charging your 20% interest and you had a $1000 debt that you did not pay, in four months you would owe over $2000. If you couldn't pay the $1000, how much more trouble will you have to pay $2000? That is a real hazard with credit card debt.
If the credit card company cancels your card, they will send bill collectors to get their money, plus interest. Not only that, but your default will be placed in your credit history, which will make it difficult to get a loan or another credit card. It may take years to regain a acceptable credit history after a default.
Getting a card
There are all sorts of ways to get a credit card. Banks, stores, even Amazon.com offer credit cards. Some are solicited through the mail. With the 2% store fee and the high consumer interest rate, providing credit cards is a lucrative business.
All you need is to send in an application and, if you have sufficient credit, you will be given a credit card.
Poor credit history
If you have a poor credit history, such as having goods repossessed, going bankrupt, having a credit card cancelled or even being late on payments, it can be difficult to get a credit card. Some banks offer secured credit cards if you have a sufficient amount in a savings account. You cannot go below that balance or the card will be deactivated. If you charge over your limit, the bank can take the balance from your account.
No credit history
Young people with no credit history can also get such a credit card as a way to start to build up their credit. Also, if they have a good job with a company that has a credit union, they often can easily get a credit card through the organization.
You can use a credit card to purchase items, instead of paying in cash. You build up a debt on your purchases, and you must pay a minimum amount each month. You are charged a high interest rate, whatever amount you do not pay off. People who do not pay off their credit card debts can increase the amount of money owed rather rapidly. It is easy to get a card from banks, stores and other organizations, provided your credit history is acceptable.
Resources and references
Student Credit Cards - From Credit Card Insider
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Buying with a Credit Card