by Joyce Good Henderson

Created on: March 13, 2009

Credit card 101: Facts about credit cards

Credit cards

No one starts out thinking, "I want to run up thousands of dollars of debt before my thirtieth birthday!" But without understanding how credit cards work and how to use them to your advantage, it is easy to get in over your head. Here's the low-down on the different types of plastic:

Charge Cards

American Express is the most popular example of this type of card, which requires you to pay off the full balance each month. If you have an excellent credit history or need discipline imposed on your charging habits, this might be the type of card for you.

Debit or ATM Cards

Debit cards look like credit cards because they are issued by a local bank under the Visa or MasterCard names, but they tied directly to your checking or savings account. When you use the card, money is automatically deducted from your account. No interest rate to worry about, and no minimum monthly balance, however, where you can run into trouble is forgetting to deduct the amount of the debit from the balance of your bank account. Think of the card not as a credit card, but as a plastic check.

Credit Cards

These allow you to carry a balance from month-to-month. Visa, MasterCard, Optima and Discover are the most popular credit card issuers. Each month you can pay the minimum payment, the full balance, or any amount between the two. But the unpaid balance accrues interest, according to a rate that may be fixed or variable and varies from issuer to issuer.

Remember: The credit card industry is just thatan industry. Charging you interest is how credit card issuers make money. When they discover they can't make money from interest payments because you are a person who pays off the balance every month, they may try to impose an annual credit card fee. If that happens, switch to another card. You should never have to pay for being a wise consumer and money manager.

Believe it or not, credit cards are not the root of all evil. When used wisely, they build your credit history and show lenders that you are responsible enough to handle loans for bigger items, like a car or house. And they are convenient. But, never allow them to take over your life. Digging your way out of a credit mistake can take a great deal of discipline, time and hard work.

It is easy to get "credit amnesia." Using that little piece of plastic is so simple. It doesn't involve taking cash out of your wallet and counting it out. It doesn't require spelling the amount out on a check and recording it in a ledger. Nothing to keep track of. But by the time the credit card bill comes the next month, you may be in for a rude awakening. It's amazing how quickly those purchases can add up.

Advice: Carry a checkbook ledger and use it to keep track of your credit card spending. Tracking your expenditures will prevent you from charging more than you can pay off. It also gives you a list to check against your bill to make sure there are no errors.

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