Nearly everyone has a credit card or knows someone who does. Credit cards are an asset when used judiciously, help build credit and make travel and shopping convenient. Many people feel safer carrying plastic than cash.
Credit card companies and banks depend on the fees and APR (annual percentage rate) they charge their cardholders for their profits. There are many types of credit cards and not all of them are right for all consumers. Credit cards are generally unsecured debt, or money the cardholder owes that has no backing collateral. The exceptions to this are the pre-paid credit card and secured credit card, both which can be used to repair damaged credit.
A secured credit card is backed by collateral, or something of value that the credit company can seize if the cardholder fails to pay their balance. The collateral is usually equal to or exceeds the available credit balance.
Consumers who are trying to build up their credit, whether they are just starting their credit history or trying to recover from poor credit history generally use these cards. Prepaid cards are becoming very popular with the parents of young college students as a way to keep them within a budget but still give them a bit of freedom in how they spend their allotments.
Consumers who try to avoid paying higher interest are using Balance Transfer credit cards more and more. Transferring a balance from a high interest credit card to one with lower interest can be a real money saver.
Some cards have an introductory rate of 0% APR which increases after a specific number of months. If you have a large balance on a card that has a 16% APR and transfer it to a 0% card, you’ll save hundreds of dollars in interest. For this reason, balance transfer cards are doing a great business. The terms very widely between cards, so be sure that you know the conditions of each card.
Balance transfer cards can be very useful when purchasing large-ticket items like appliances on one credit card then transferring the balance to the 0% card.
Cash back credit cards reward the cardholder by returning 1% or sometimes more, of their purchases. Even mortgage companies have jumped on the cash back bandwagon, applying the 1% to the cardholder’s mortgage principal.
Over time, and as long as you don’t incur interest fees by carrying a balance from month to month, that 1% can be a significant contribution to paying down your mortgage. Some credit cards send the cardholder a check while others apply the rebates to the balance owed, if any.
There are other types of rewards for using credit cards, too. Consumers can get cards that award them mileage on airlines, points that are used to purchase merchandise, rewards of gasoline rebates or points toward lodging or entertainment. Some of these cards, however, charge a yearly fee to cover the costs of rewards so it pays to read the terms and conditions of such cards.
When used responsibly, credit cards can be a real asset. They are convenient, accepted nearly everywhere and make it easy to track expenses. In addition, unlike cash, if they are stolen your losses are minimal or none.