Credit Cards

Can there be anyone in 21st-century America who’s unfamiliar with credit cards? There are more than 1.1 billion credit cards in the country, and the average American wallet has 3.84.

So, we have them. And we’re using them. But are we sure we really know how credit cards work? Let’s find out.

Paying With a Credit Card

You can use credit cards to pay bills, cover travel expenses, and buy things online or in stores. When you use a credit card, the merchant's bank requests authorization from the credit card network to process the transaction. Your card issuer verifies your information and either approves or declines the transaction. 

If approved, the card issuer releases funds to the merchant and subtracts that amount from your available credit. At the end of your billing cycle, your credit card company generates a statement showing your monthly transactions, your previous balance, and your new balance. The statement also discloses your minimum payment due and the due date.

Your card has a grace period – the time between the purchase date on your card and the due date listed on your statement. If you pay your bill in full by the due date, no interest charges accrue on new purchases. Otherwise, you’ll owe interest based on your rate and account balance.

Credit Card Advantages

For some, the main advantage of credit cards is their convenience. You can pay in-store or online in seconds. And you don’t have to handle grubby cash – or risk losing it to thieves or carelessness.  

Indeed, you may not need the card. There are more electronic “wallets” that you can keep on your smartphone. Amazon Pay, Apple Pay, Google Pay, and Stocard may be the most famous.

And once you’ve linked your card(s) to one of these apps, you can pay with your smartphone in just a few clicks, often by holding your phone close to the payment terminal. Now, that really is convenient.

Payment protection

But credit cards aren’t just convenient. They’re also the safest way to pay for goods and services. Yes, even safer than debit cards.

According to Cornell Law School, the Fair Credit Billing Act of 1974 gives unique protections to “open-end credit” like credit cards. As long as you dispute a payment within 60 days, you can’t lose more than $50 when amounts are wrongly charged. 

The Act protects you against “inaccurate statements, undelivered or unacceptable goods, and transactions by unauthorized users.” Of course, many card issuers now waive that $50. So you may well enjoy 100% protection. 

Better than debit cards

Don’t you get the same protections with debit cards? Yes, probably … in the end. True, there isn’t the same legal requirement. But most banks will refund your losses.

However, there’s a significant difference. When you dispute a credit card transaction, it’s the card issuer’s problem. Because you don’t have to pay the charge – at least until later, if it proves to have been correct all along.

But a debit card transaction has already left your bank account before you can dispute it. So it’s your money at stake, not your bank’s. And it can take weeks or months for that bank to investigate your complaint and return your funds. 

How Reward Credit Cards Work

Rewards are among the most popular credit card features. Pick the right plastic, and you can earn points, miles, or cash back on some, most, or all of your spending. 

Cashback is the most popular form of reward, according to Statista. Who doesn’t like free money? Other popular rewards programs deliver points for travel, goods, or services. You can match your cards to your lifestyle to maximize your rewards. For example, if you fly a lot, the air miles you earn could contribute a chunk toward a vacation or leisure break. If you have a hotel card, too, that trip could be close to free. 

Rewards card rules for accruing and redeeming rewards can be complicated. You may be able to have cash deposited into your bank account or credited to your statement. You can usually order gift cards, travel, and merchandise rewards at your card issuer’s website. Stay on top of your program to make sure that your benefits don’t expire before you can use them.

Rewards can be profitable if you pay your balance in full each month and if the benefits you earn exceed any annual fees.

Card Perks

Some customers find their cards’ perks almost as valuable as their rewards. For example, imagine you’re a frequent flier who spends countless hours each year hanging around airports.

Pick the right airline or travel card, and you might get free access to lounges – and priority boarding. Both those should reduce the living hell that is most airports. But you might also get some free checked baggage or inflight perks. 

Not all cards offer such apparent benefits. But many have concierge services that can get you special VIP access to concerts and sporting events or obtain unobtainable reservations in restaurants where others have to wait months for a table. Another potentially valuable perk offered by some credit cards is purchase protection. Purchase protection is a form of insurance. You can claim reimbursement from the card issuer if an item purchased with the card is lost, damaged, or stolen (check your car’s terms). 

Again, these perks tend to come with cards that charge an annual fee. So be sure you’ll get value for money. There’s no point in having an airline or travel card if you fear flying. Nor a card with concierge services if you hate music, sports, and dining out.

How Credit Cards Work with Credit Scores

The lower your credit card balances, the better your credit score. Credit scoring models analyze the relationship between your credit card balances and how much of your available credit you're using (this is your “credit utilization” ratio). If your credit card limits total $10,000, and you owe $1,000, your credit card utilization ratio is 10% ($1,000 / $10,000 = .1). That’s quite low and can help your credit scores. On the other hand, if you owe $8,000, your utilization is 80%, which is high enough to harm your credit scores.

Credit cards also contribute to your mix of credit (10% of your score) and the average of credit (15% of your credit score). Finally, repayment history for your credit cards and other accounts comprises 35% of your credit score. Use your card and pay it on time to protect your credit history and score.

What Are Secured Credit Cards?

Consider a secured credit card if you’re trying to establish or re-establish credit and can’t get a credit card company to approve you.

With a secured credit card, you deposit an amount with the card issuer that usually equals the card’s limit. So if you fail to pay your balance, the card issuer can just keep your deposit. Secured credit cards look like regular credit cards and offer the same conveniences. Make sure your card issuer reports to major credit bureaus so your payments can help build a good credit history and score. 

Secured credit cards can be expensive – understand the monthly maintenance fees, annual fees, and other charges before applying.