The Finance Fiend

Getting Financial Freedom by 35!

Consumer Ed 101: Credit Cards April 27, 2009

Filed under: Uncategorized — Rebecca @ 12:09 pm
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Where did they come from?

These days it seems like everyone takes credit cards: grocery stores, restaurants, even gas pumps. But where did they come from? Well the first plastic was the Diners Card. The Diners Card made it so you could eat at one of 27 New York restaurants and not have to pay, until the end of the month.  The card didn’t allow people to carry a balance though, meaning it was actually a charge card. The Diners Card was aimed at the well off and traveling businessmen.

American Express and Bank of America (VISA) issues their own cards in the late 50s.

Credit cards gained federal regulation in the 70s with additional and modified laws as time progressed. Before that some credit cards would send active cards out in mass mailings. Talk about identity theft!

What are the requirements to get a card?

In this day and age, anyone over the age of 18 with some source of income can get a credit card. If you go over to creditcards.com you view all sorts of cards for all sorts of people.  Since everyone is different, many credit card companies have cards for certain groups.

College students can get cards with specific rewards for purchases at bookstores or restaurants.  Another, great option for the financial infants: prepaid cards.

People with longer credit histories, and high credit scores can expect the greatest and best perks. Lower interest rates, bigger rewards, etc.  Its all based on your amount of risk to the credit company.

Prepaid cards

Benefits:

These are similar to a bank debit card, you have to have money to spend money.

You generally don’t need a credit history, and if you have a poor credit history you can still get one of these cards.

Most of them will give you perks for direct deposit of your paycheck or “government funds” and allow you to withdraw your money and ATM for no fee.

They build your credit.

A few will even pay you (via interest) to use their card.

The cons:

Most cards have a balance limit ($5000 or $10000 dollars).

Many cards have weekly or monthly fees. (That means its not useful for an ’emergency’ card or backup card. Its meant to be used for day to day purchases.)

Many want you to have direct deposit or pay additional fees.

Rewards Cards

These cards allow you to earn ‘points’ or “miles.” You can turn the points in for gift cards or merchandise and the miles are used for buying plane tickets. Other rewards cards will have large annual fees but allow access to travel lounges in airports, or concierge service and other benefits at hotels.  Depending on your circumstances you can find a card that will benefit you.  Most people may not need special concierge service, but may enjoy earning a free plane ticket.  Most cards will focus on a certain area that you can earn extra rewards like travel purchases, retail purchases, and even certain on-line retailers.

A sub category of the rewards cards are the cash back cards.  They will give you back a certain percentage of your purchases in cash (sometimes they are rewarded as points and you turn in points for cash).

Many retailers offer rewards cards either saving you at the POS (initial purchase) or with cash back.

Other cards:

Other companies offer particularly low interest rates for purchases or balance transfers. If you have credit card debt at a really high percentage rate and cannot get the credit card to lower your interest rate, you may want to look into a balance transfer credit card.  A balance transfer will usually involve a fee (say 3%) and then have a different interest rate than for new purchases. Occasionally you can find a card that offers no interest on balance transfers for 12 months or more. If you are working on paying off debt, a balance transfer could boost your repayment.  If the card adds on 3% to transfer the card, and then you don’t pay interest for a year, that’s effectively like paying 3% interest for a year. I have yet to see a credit card offer that as an APR (except for specials where you get0% interest).

They aren’t all bad

I don’t think people should all go out and get lots of credit cards, but they do have a place.  Credit cards used responsibly can make your life easier.

We have a credit card, that we use for all of our household purchases.  The company has a special program on their website that categorizes our purchases and shows how we spend each month in areas, as well as help us track spending over the year.  Its not a substitute for a regular budget, but it does make it easy to say “we have spend 24% of our purchases on eating out this month, whoa Nellie.”  Even if we have not made our other typical monthly purchases (gas, groceries, etc) it can stop us from grabbing a burger on the way home in order to not go over our budgeted $50 in our spending.

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