It's like saying you've never seen anyone talk on a telephone. Plastic cards are the ultimate convenience products because they make your purchases so easy.
But using plastic means more than just "zip-zip, sign on the line." They're more complex than they appear.
We use credit, debit, and prepaid cards most often. They look the same, but here's how they work:
I'm a special kind of loan!
Credit cards let you buy things now and pay for them later. They give you a special kind of loan, called a line of credit, which you can use to pay for a purchase instantly.
When you use the card, you agree to pay back the amount of your purchases PLUS interest.
Every time you use your card the total amount you've borrowed and the interest you owe changes.
Card issuers make money by charging you that interest. That's why you want to look for cards that offer a grace period.
You can use that kind of card as much as you please without paying interest if you pay the full balance within the card's grace period.
Some cards don't charge interest until after the grace period. Some begin adding interest from the moment you make a purchase, so check out the details before you apply.Credit reports tell a lot about how you pay back money you owe.
Card issuers also make money by charging you a variety of fees:
- User fees: Some issuers charge a fee every time you use their card.
- Late fees: Issuers charge a late fee if you miss a payment due date.
- Annual fees: Some issuers charge annual fees—like rent—for the privilege of using their card.
After a certain number of late fees, the issuer can void, or cancel, your card so it no longer works.
Read on to find out about another kind of plastic...