credit card

The first credit card was created by Diners Club in the 50's, followed by American Express. The concept of credit purchases was refined in the 20's, when mail-order catalogs became popular. Currently Visa is the world's largest credit card group, with Master Card coming in second.

Under United States law, if you are a minor, you are not obligated to pay for any charges you incur on your credit card.^* Therefore, it is somewhat odd that credit cards are so often offered to minors. This isn't limited to mailed offers. This happens often in retail stores, even those that specifically cater to minors (such as Claire's). Granted, they don't extend much credit beyond $200, but there is a valid risk to them.

There must be something to be gained for them to do that. My assumption is that these companies are trying to familiarize children with the buy now - pay later concept, to create a nation dependant on credit. With a large percentage of purchases made through credit cards, it is easy to see who loses. It's the consumer. Retailers get hit with the fees from their merchant account, so they can process credit cards. They, in turn, pass the savings onto you.

If you're smart, you're using a card that offers cashback or some other real benefit to recover a little portion of that. I hit the jackpot with an Associates Visa, with 3% cashback on everything. It beats the crud out of Discover Platinum's "up to 2% with exclusions". Other cards offer frequent flyer miles and discounts on automobiles. There's something for everyone, but in the end, we all get screwed.

^*Just a note: legally, credit card companies cannot force minors to pay, but I don't know if it goes on their credit report. Also, if you have a co-signer, they are responsible, of course.

What:

A small plastic card, about 8.5 cm. by 5 cm. (3.25 by 2 inch), with a magnetic strip on the back. It allows you to take out short term loans from the company that issued it.

Why?

Well, the magnetic strip is there so that you, and thus your account, can be quickly identified by a scanning machine. Your information is then sent via the phone lines to the credit card company, who will, with luck, authorize the loan. This all happens in under 30 seconds.

Besides the fact that it's really cool to have all your money inside this little card (fast and convenient!), it also provides (in theory) some small protection against theft, as you can cancel the card if it's lost or stolen, so that it can no longer be used. There are also laws dictating how much you can be charged if a thief takes your card; these vary from country to country, so I'll let you do your own research.

You can also pay for things without being there -- the card will have an identification number, which can be typed into a vendor's credit card machine, allowing them to charge you even if they don't have your card. Thus, you can order things on-line or over the telephone.

Buy now, pay later. Yet another advantage -- you can pay for things even if you're broke. This will catch up to you, because you do have to pay the company back sometime.

Need real money? Most credit cards also provide cash advances -- for a small fee.

But we should also mention....

Credit card companies don't provide this service out of the goodness of their hearts. They get money from it.

First, some cards charge an annual fee. This isn't common, at least in America.

Second, if you do not pay off your bill (pay the credit card company back all the money they have loaned you for the month), you are charged a high interest rate -- usually 10%-15% per year. In order to avoid crass words such as 'interest', this may be called a finance charge.

Third, even if you are being charged this high interest rate, you are expected to pay the credit card company some small part of the amount you owe them every month (about 10%). If you don't, they will add a small charge onto your bill, which will then also start to be charged interest. They will usually also drastically increase your interest rate, to over 20% per year in many cases. They will also charge you if you go over your credit limit or are late in your payments.

And fourth, stores pay some small amount to the credit card company every time they charge something to a customer's card.

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The major credit cards are MasterCard, Visa, American Express, and Discover.

Alternatives are the Debit card, Electronic Check, check, and good old fashioned cash.

I, like many other wet-behind-the-ears college students trying to make their way in the world, applied for and received my first credit card about a year and a half ago. At first, I wondered how on Earth my credit card company could make money off of someone like me. Sure, I used the card for practically everything: groceries, textbooks, clothes. But I paid off the balance religiously practically every month. So, they weren't making anything off of me, except for a few piddly cents of interest every year from the times when I actually carried a balance.

Then it hit me, just a few nights ago, as my boss explained the finer points of managing the massive overhead that is the liability of every restaurant: basically, credit card companies don't make money off their customers. Instead, they make money off merchants. Even if the customer is a goody-two-shoes like me, who almost never carries a balance, they still make money off of me, however indirectly.

You see, in order to accept credit cards as payment at their businesses, merchants have to open an account with the credit card company in question. For every transaction made by credit card, the merchant must pay a transaction fee, either a flat fee of a few cents, or a specific percentage of the charge (usually in the neighborhood of 3%). It's not unusual for both to be used simultaneously — shaogo kindly informed me that the credit card companies of which he is a client charge 15 cents across the board. On top of that, American Express charges him 3.5%, and Mastercard and Visa both charge him 1.8%.

So, to give you an example: I go to a gas station that accepts my particular credit card, and purchase $11.00 worth of goods. The credit card company charges the merchant, say, 30 cents for the transaction, and by that, makes the bulk of its income. Even if I carry the balance of the $11.00 over to the next month, only a wickedly usurious interest rate will match the transaction charge applied to the merchant's account.

This is often why many businesses (in violation of many card companies' contracts) require a minimum purchase to pay by credit card, and why some businesses have eschewed credit cards altogether; all those transaction fees add up, forcing businesses to raise prices (or absorb the loss). So, indirectly, despite my not being charged interest for my purchases, the credit card companies still make money off me.

Now, sometimes, credit cards will offer suspiciously good deals to customers, like cash back programs, interest grace periods, frequent flyer miles or 'points'. They can afford to do so, because they don't make the bulk of their money directly off of you, the consumer; they make most of their money by charging merchants for the privilege of using their cards. They can afford to give you a few dollars back for every couple of hundred you spend, because the transaction fees are more than enough to put them in the black.

_{Thanks to TenMinJoe for pointing out that my original example of a merchant charge of $3.00 was off by a factor of ten and suggesting a far more reasonable fee of 30 cents, or roughly 3% of the total transaction. Also, thanks to shaogo for pointing out that many credit card companies, such as American Express, specifically forbid their clients to require customers to make a minimum purchase if paying by credit.}

I personally believe that credit cards are awesome, maybe The Best Thing Since Sliced Bread^® (okay, probably not). I get perks on my normal, day-to-day expenditures. Why would I complain about that? Of course, I'm keenly aware of all the misuse of credit cards. It's easy to forget that $10, $5, and your monthly bill turns out to be a rather hefty chunk of change, but I blame the credit card companies' greed more than anyone's lapse of judgment for many of those issues.

What? Crafting a consumerist driven economy and loading it with obscene amounts of debt, so you can charge interest off it wouldn't have consequences? Please.

Anyway, what was the point of this writeup? Oh. Right. Why credit cards are useful.

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Credit cards come with a lot of perks that people tend to forget about, besides features such as cashback or rewards programs like Discover Card's Cashback Bonus or the famous American Express Memembership Rewards Program, a lot of credit cards and charge cards offer some perhaps more unexpected things like extended warranties, return programs, or travel insurance. In particular – since I imagine a lot of us like shiny electronics – I'll make note of the extended warranty program.

Extended Warranty
This is on almost every card in the United States, except Discover Card (Maybe Morgan Stanley didn't cozy up to the idea before they spun them off?); BankAmericard and MasterCharge offer it on their platinum cards only; American Express cardholders are in luck, they get them on any card American Express issues directly. The warranty extensions tend to have some caveats (i.e. no, your fruit salad that went bad is not covered under your card's extended warranty), but for stuff like consumer electronics and whatnot, you'll probably be surprised that your credit card company might be footing the bill for the repair. Each card handles them differently, some might request an estimate before approving, others might have you do the repair and then just reimburse you for it. Sometimes I've heard they might deem the repair not worth it and just give you the original purchase price of the item.

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So yeah, go and find out about your card and use those benefits! Credit cards aren't completely debt inducing scourges of the American consumer...at least I hope not.