Credit Cards

Credit cards are consumer credit products offered by banks, building societies and certain online lenders that allow users to pay for items and services using credit backed by the institution that has issued the card.

How do Credit Cards Work?

Credit card accounts are run on a monthly basis: the card user purchases a number of items or services within a given monthly period, and is then presented with a statement detailing the amount of credit used. The borrower should pay close attention to any credit card statements received, as they detail the purchases they have made that month and the amount of credit that must be repaid.

The borrower then has the option of either paying the debt off in full before a given date, or making a partial payment. If the borrower makes a full payment of the money owed, they are usually charged no interest on the debt: they can pay it off simply by paying the exact amount owed into their account. If the borrower makes a partial payment, however, then interest will be charged on the debt. Depending on the lender, interest could be charged on either the amount of debt remaining after any partial payment, or on the full debt accrued before any partial payment is made (this excludes interest free credit cards, which usually have an introductory period of a number of months where no interest is charged). In addition any credit card payments made, whether the full amount owed or less than the full amount, must be made to a minimum level before a certain date; if a minimum payment is not made before the stated date, then the borrower is judged to have defaulted on their payment and will be subject to credit card charges.

Paying for Goods over the Phone

It is sometimes possible for holders of credit cards to pay for goods over the phone: these are known as card not present transactions. Cardholders should take care when doing this, however, as such payments mean they have to let the institution taking the payment know the three digit security code on the back of the card. After making a purchase the buyer should ensure that the merchant destroys any record of that number.

Cash Advances

An additional service with most credit cards is the ability of the card holder to obtain a cash advance. Cash advances involve the card holder using their credit card in an Auto-Teller Machine (ATM or bank machine) to withdraw cash as they would with a standard bank card. Account holders should beware of using this service, however, as interest rates are usually higher than when making purchases, and additional credit card charges are usually made for using this service.

Balance Transfers

Many credit card users employ balance transfers as a way to manage their debt. Balance transfers are the transferring of outstanding balances from one credit card to another; many card providers offer interest free periods for those transferring balances, which allows the card user to make payments without any interest being added to the transferred debt.

Special Types of Credit Card

There are a number of special types of credit card available that are targeted at specific users, or offered by certain institutions.

Store cards are credit cards offered by department stores and the like to allow purchases within their stores only, while credit cards for bad credit customers are aimed at those consumers who have a poor credit rating. Prepaid credit cards are generally aimed at younger consumers that haven’t had a chance to build up a credit rating: money can be prepaid onto the card by parents and the card holder can then spend up to that limit. Cash back credit cards, on the other hand, offer money back on purchases, which can be used to purchase more items, or pay off previously taken out credit.