Credit cards are a form of unsecured credit. The issuer is extending you a line of credit, usually tacking on all sorts of little surprises in
fine print. This type of credit is probably most commonly used.If you have a great credit rating, you’re probably bombarded with offers of new cards. They usually carry no annual fees, interest rates are reasonable (as far as credit cards go), you get close to a month’s grace period and there might be some fetching initial offers, such as no interest for 6 months on balance transfers and new purchasers.
Others of us who are not so lucky, might have to pay $20 or more a year for a card, interest rates will be higher and come-ons less enticing or non-existent. Grace periods may be as short as 20 days and you might have to make sure you payment is received early enough so credit card company will consider it paid on time.
Still others might not be able to get anything other than a secured credit card, one where you make a deposit first and then are allowed to charge to extent of deposit. This kind of card, while expensive, can be helpful in rebuilding credit if you have had credit problems.
Then there are cards like original American Express or Diner’s Club cards, where you’re expected to pay entire bill every month as it comes due. This kind of card forces you to be more careful with your spending, although it is becoming more frequent for a line of credit to be attached to them also, to allow you to pay for some purchases over time.
Credit cards are not bad things in and of themselves, but can become bad things very quickly. You can charge just about anything and get to pay for it about a month later. You can take part in many rewards programs and get points for things you would have bought anyway, like food or gasoline. This is all great if you pay off bill every month.
The problem is that if you run up your credit card debt, but only pay minimum payment, that $300 TV you got on sale will really cost well over $1000. It can take 10 or more years to pay off a $5000 debt if you only pay minimum each month. Most people are unlikely to want to pay off a tank off gas ten years after it was used up.
If you read your monthly statements closely, you will see that monthly minimum payment is barely enough to cover your interest due for that month. You are not making any dent in amount you owe.
So probably best solution is to stay away from credit cards. But that probably is also not a realistic solution for most people. And credit cards are necessary for some things; for example if you want to rent a car. They can be very handy in an emergency.
