Let's face it, credit cards are completely embedded into our society. With these magic pieces of plastic (and sometimes even metal!), we can purchase nearly any item at a store and pay for it later.
To many, credit cards are useful, and even necessary for internet purchases. For others, they have placed the cardholder into irreversible debt and making it nearly impossible for someone living paycheck to paycheck to ever escape the debt without going bankrupt.
So how did we get here? Did these cards come into existence suddenly? Who was the first business to say "I'll provide you goods and/or services, just let me copy down that card number and we'll figure out the debt in a month"? Well, like many things, it was a gradual growth.
Early Days: Diner's Club Cards
These cards were used to identify holders of the Diner's Club Cards
Back when money and checks were being used to spend, a new type of payment system surfaced. The Diner's Club allowed people to purchase on credit at particular diners across the United States.
This was the first evidence of credit cards being used by the public.
A full history can be found here.
How a Credit Card Works: A view from both sides
Credit cards are great if you know how to use them as a customer. Here are some basic tips:
- Understand how the rewards systems work
- Understand the penalties for "borrowing" the money on credit
- Avoid accumulation of debt you cannot pay off
- Use the rewards in a way that helps you succeed financially
Four easy steps to follow. When you swipe your card, you are responsible for the cost incurred. You have two choices as a customer. You can either pay off the card immediately and not have to pay any interest, or you can decide to maintain a balance and pay interest on the owed money. It is not advisable to charge money to a credit card without being able to pay off the amount in full, as the interest rate can be as high as 28%! And often times, your credit card will compound the interest, meaning that you not only pay interest on the original money spent, but also the money owed from interest charges. Be careful!
Once you figure this out, credit cards can be a rewarding process through, you guessed it, rewards. Many credit cards will give you a small cashback percentage or even points that can be applied towards things like travel, electronics, services, etc.
Some credit cards are fantastic, while others don't give much rewards. I tend to opt towards the cash back option, as it allows me to accumulate earnings over a year or two, then use those earnings to pay off an entire monthly bill for free. My friends tend to like earning points towards travel, which is also a great perk.
From the business perspective, credit cards may offer a convenience, but at a cost. Most of the time, when a merchant accepts credit cards, they are subject to something called a merchant fee. When a customer swipes their card at your business for $100, a percentage of that money is kept by the credit card company as payment for helping facilitate the transaction. If the fee is 3.5%, the credit card company would take $3.50 from that $100, and possibly charge $0.10 or so for each transaction. This means that if a customer makes a $1 purchase via credit card, you would be giving over 10% of the sale to the merchant for it being such a small amount of money. This is why many smaller stores have a $10 minimum purchase via credit card.
So What Should I Look For In a Credit Card?
As a potential credit card user, you will want to figure out what is most important to you. You may find yourself signing up for multiple credit cards at once, or you might simply decide on one universal card to keep it simple (but at the cost of not earning the max rewards for certain types of purchases). You'll also want to decide on which company you want to use, such as Visa, MasterCard, Discover, American Express, etc.
Here are some ideas to consider:
- Some credit cards give a guaranteed but restricted percentage, such as Amazon's Prime Card, which gives 5% cashback on all purchases made on Amazon as long as you have Amazon Prime
- Some cards will have cycles of bonuses, such as 5% cash back on gas purchases over a 3 month billing cycle, or 5% cashback on groceries, etc.
- Some cards will earn you points towards specific things such as travel, food, electronics, etc.
- Some cards will give you a signup bonus
- Some cards will give you bonuses if you spend a certain amount of money each month
There are so many choices! It may seem difficult to choose the perfect card, but the better advice is to choose 2 or maybe 3 credit cards that will fit your needs. Don't obtain all 3 at the same time, but rather sign up for one card, use it for a while and learn about it, then introduce a second card if you feel it is a good fit for your financial situation.
Last But Not Least
One of my preferred methods for credit card management is to set it up so your checking account automatically pays the balance of the card. I put this in place to mentally keep myself committed to avoid any interest charges. To make this a safe system of transactions, I also leave an extra month's worth of necessary money in my checking account. This way I never overspend.
Here are the credit cards that I personally use, and why:
This card gives 5% cash back to all Amazon Prime members. Many of my purchases are through Amazon, so this helps me out a lot. It automatically gives me the cash back rewards as a credit on the next bill, so it is really nice to constantly have a 5% discount on Amazon. I even buy Amazon Prime with it.
This card is pretty cool, as the rewards shift every 3 months. Some cycles will give me 5% cash back bonus on things like gas, hotel and dining, while other times I will get a 5% cash back bonus for groceries. As the rewards change, so do my spending habits with that card. I try to utilize the 5% specific rewards with this card.
Originally, I did not have the Amazon Prime Card, but instead only had the Amazon Visa Card. This card is pretty good, as I get 5% cash back on Amazon, 2% cash back on food & gas, and 1% cash back on everything else. It's not perfect, but it's simple and I like it.