Credit cards: we've all seen 'em…but what are they?
Credit cards are basically plastic proof that a credit card company like Visa, MasterCard, or another company has extended you an unsecured, temporary loan. There's a limit on your Visa card—$500, $1000, $10,000 or more—and you can borrow up to that amount every month as long as you pay it off.
But with most credit cards, you also have the option of carrying your debt over. You can pay just the minimum on your credit card—usually just the interest rate—each month. It's a lot less painful than paying everything off at once, but credit card interest rates are high (rates of 20% aren't that unusual), so that spending spree can really add up if you don't pay it off right away. Paying late or going over your limit can also hurt your credit score, which then causes your interest rates to go up.
Wait, come back. Credit cards aren't all bad.
Here are some of the benefits.
- Credit cards let you pay for gas without walking 16 steps into the cashier and they allow you to buy that cheeseburger shaped phone you find online at 2:00AM and just need to have. Plastic just makes buying stuff easier.
- Plus, if you change your mind about the burger phone when sanity returns at 9:00AM, you can get the credit card company to refund your money if the retailer refuses to. If you were to buy your burger phone with cash from a guy in a trench coat, your money would just be gone. (Pro tip: don't buy anything from guys in trench coats.)
- Credit cards can also give you peace of mind. If you decide to go on a road trip to the Grand Canyon with your Uncle Robert on a whim, you know you're covered if Uncle Robert needs to be bailed out of jail for chasing after weather balloons (again—he's really had a thing for them since 1982) or if your car breaks down in the middle of nowhere.
- Lots of credit card companies want your business, so they offer rewards. They might offer cash back, so that you earn back a tiny percentage of the money you charge, or they'll give you air miles for travel or points you can redeem for espresso machines and gift cards.
And of course, who doesn't want to whip out a card at the local store and say "charge it" while piling the counter full of stuff?
Plastic isn't just a little security and ego stroke, though. It's pretty much a must-have for any red-blooded American adult. No one's going to take your passport away if you don't have a MasterCard, but not having plastic can be pretty bruising.
Sure, you might feel smug about paying cash for everything—no one will ever steal your identity!—but without plastic, it's a bit harder to build up your credit rating…and that makes it harder to score an apartment, job, car loan, or pretty much anything else you need to live well in this country.
Having a credit card and being responsible with it helps you get better rates on your insurance, too, and can even help you get more credit cards (because that L.L. Bean one is just so pretty).
Of course, there's a dark side to credit cards, too—and it looks a lot worse than anything George Lucas ever came up with.
Credit card companies are associations. They need to make money to impress their investors. To do that, they need to get as many credit card customers as possible and get those credit card customers to pay. That's why every time you peek in your mailbox, there's a pre-approved card offer; that's also why you see ads for credit cards in movies, all over your favorite blogs, and on billboards on your drive to class. These guys are so ruthless, even UFC fighters run from them.
And they're expensive. Buying something on credit and then carrying a balance on your credit card is the most expensive way to get a temporary loan. And just like your favorite Soprano, credit card companies can shake you down hard if you try not to pay. Skip a few payments and you might not be swimming with the fishes, but you will be pursued by collection agencies until you wish they would just take a kneecap and be done with it. Credit card companies can increase your interest rate if you can't pay, which of course makes it even harder to pay off what you owe. They can pursue you with collection agencies and legal action until your credit rating is ruined and can even cancel your card without notice, meaning that everything you owe is now due all at once—or else.
Think of credit cards as a way to boost your credit score, but treat them with the same care you'd treat a celebrity ego. Pay off your credit card on time every month, and don't use your plastic to pay for stuff you can't afford. Pretty soon, you'll have great credit…and you'll still be able to afford lunch.