Credit Card Basics
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Credit Card Basics

There are three basic charges that you can use credit cards ...

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You no doubt know the basics about credit cards. You get to buy stuff now and pay later. We're going to get a little more specific than that so you can understand why these great little cards end up being the financial downfall of so many people!

You get a credit card after you fill out an application and the bank approves your application based on your credit history (provided by one or all of the three credit bureaus). Credit cards are a form of revolving credit, which means that there aren't a set number of payments like there would be with a traditional loan.

There are three basic charges that you can use credit cards to finance: purchases, cash advances, and debt transfer.

Each time you use the card to "pay" for a purchase, you are getting a little loan for that purchase from the bank that issued the credit card. Have you ever looked at the credit card slip that you've signed? It says that the cardholder (you) promises to pay that amount to the card issuer (the bank). Your signature was once required, but the laws have changed due to mail order phone orders and e-commerce. You can now enter into a verbal agreement over the phone or an electronic agreement online.

The store electronically contacts the bank, who will either approve or decline your card based on the amount you have left of your credit limit.

After approval, the bank pays the store where you made the purchase and sends you the bill at the end of the month for all of your purchases. With most credit card agreements, if you pay the bill in full (all of the charges you've put in the card on that month), you don't have to pay any interest. This is called a grace period. Most banks give you a grace period from interest of 10-60 days from the time of the purchase. There are some cards that require that you pay for all of your charges at the end of every month. Although the terms have become confused, those cards are technically called charge cards.

Most people do not pay the entire balance at the end of the month. They pay the minimum amount that the bank requires and allow the rest of the balance to remain on the credit card. When you leave a balance on credit cards, you accrue interest, which is more money added to the amount you have to pay.

Cash Advances
Most credit card banks assign you a PIN (personal identification number) that allows you to use your credit card to get cash. You can then use your credit card at an ATM machine, at a bank, or to send money on Internet services like Paypal.

The problem with cash advances is that there is often a cash advance fee, a much higher interest rate, and there is no interest grace period. Cash advances should only be used in emergencies and should be paid back as soon as possible.

Debt Transfer
A lot of credit cards will offer 0% or very low interest on credit card transfers. This means that you can transfer existing balances from other credit cards to your new credit card. The advantage is that you can get a lower interest rate on your old purchases. The disadvantage is that the low transfer rate is usually a promotional, temporary rate. Afterward, you are back to paying higher interest rates.

Credit cards offer you buyer protection in case of unauthorized charges, fraud, or if you buy something that you don't receive or receive damaged. The rule of thumb with unauthorized charges is to immediately report a card stolen, even if you may have only temporarily misplaced it. You are not liable for charges after you report the card stolen. With most banks, you only have to pay a small fee (around $50) for charges made before you reported the card stolen, but most banks waive that fee.

You also have the ability to dispute charges on your credit card bill. If the bank finds the charge to be fraud or an error, they will take the charge off your card and take the money away from the store (this is called a chargeback).

From: Understanding credit and credit cards (don)
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