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I. What is a Credit Card, Really? In 2014, Americans used credit cards for over $4 trillion of purchases. That’s right $4,000,000,000,000! Obviously, credit cards play a huge role in our economy. But what is a credit card, really, and how does it work? Here’s a hint: A credit card is a form of a l _ _ n. It’s a Loan. A credit card represents a pool of funds that the credit card issuer, like a bank or other lender, has made available to the credit cardholder to buy consumer goods or services, or to get cash. Essentially, a credit card represents funds the cardholder can instantly draw on to buy things. Credit cards are referred to as revolving credit because they provide a continuous source of funds for a borrower . Every time a cardholder repays the debt or a portion of the debt on the card, that amount of funds becomes available again. This is different from non-revolving credit like a mortgage or car loan where the loan is used once, repaid over time in equal installments, and then abolished . Credit Limit. Every credit card has a maximum amount the cardholder can borrow on the card . This is called the credit limit . If the user spends up to the credit limit, the card will be “maxed out” . Further purchases may not be authorized, or if they are allowed, they will be subject to a higher interest rate . Credit card holders with good credit scores have higher credit limits. Types of Cards. When you are a working adult or maybe even when you go to college, you will be contacted by many different credit card providers, offering you access to a credit card. There are several different types of credit cards, each with different characteristics and consequences . Bank-Issued Credit Cards. Most credit cards are issued by retail banks like PNC, CitiGroup, or SunTrust Bank. Credit cardholders often have a card issued by the bank where they have a checking or savings account. Financial Services. Some credit cards are issued by companies that specialize in providing credit cards. These companies do not offer home loans or checking accounts like retail banks do. Credit cards issued by financial services companies often have special rewards programs for using the cards or different terms for repayment . Examples of financial services companies that issue credit cards include American Express, Capital One, and Discover. In general, these cards function no differently than bank credit cards and have about the same interest rates. Retail Credit Cards. Some retail outlets and consumer product companies, like Macy’s, Sony, Sears, and many airlines, issue credit cards. These cards are usually linked to the retailer’s customer loyalty program . When the cardholder uses the card, they earn points toward purchases of the card issuer’s product or service. For example, if you own a credit card issued by an airline, you can use the card to make purchases anywhere. But, for every dollar spent you earn one airline mile — sometimes more. When you have acquired enough miles, you can redeem them for a ticket on that airline. Charge Cards. A charge card is a type of credit card that does not require interest payments. Charge cards have no credit limits. However, if the user does not fully repay all of their charges each month, they are obligated to pay large fees. If you are offered a charge card, beware! It will look and feel just like a credit card, but unlike a credit card, the balance cannot be carried over from month to month. It must be paid in full. American Express is a popular provider of both charge cards and credit cards. PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 241
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