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Charging with a credit card is paying for purchases by instantly borrowing the money that you spend on the purchase. You pay later for whatever you bought by repaying the loan that you received when you made the purchase.
Credit cards are potentially the most confusing and frustrating part of household finances. Depending on your usage, keeping up with your credit card activity could be how you spend most of your time managing your household finances.
Careless use of credit cards can lead to steadily increasing, very expensive debt that can be difficult to repay. It is very easy to charge more than you can afford to pay back, especially when you lose sight of the fact that credit cards are a source of debt instead of free money.
Credit card debt can get out of control quickly with careless charging and failure to pay the monthly statement's new balance in full each month. The exorbitant interest rates charged on credit cards contribute to the rapid increase in unpaid credit card balances.
Limiting and tracking credit card usage is how overspending and the resulting credit card debt can be avoided. Ways to do this include:
Staying on top of your credit card activity is easy when you follow the four-step method available in You Need A Cash Plan.
Most credit cards have an expiration date (month/year) that is displayed on the front of the card. There are exceptions such as the Amazon Store Card which has no expiration date as the card is used exclusively for online purchases from Amazon. For credit cards with an expiration date, as long as your credit card account is in good standing, prior to the expiration date the credit card company will send you new cards with a new expiration date.
Most credit cards also have a three or four digit security code (CVV - Card Verification Value, CVC - Card Verification Code). This code is normally printed on the back of the card to the right of the signature panel. There are exceptions like American Express which prints the security code on the front of the card. When you are issued new cards to replace those that are expiring, the new cards will have a new security code.
When you receive a replacement for an expiring credit card that you use to automatically pay bills, you will have to update the credit card expiration date and security code for your account on the websites of each of the bills paid with the card. In You Need A Cash Plan, the credit card update process is aided by the Bills Paid With Credit Card dialog box. Right-clicking on a bill in the dialog box displays the bill's Contact Info.
Each credit card has a monthly billing period, which is set when the credit card is issued to you.
The payment due day is at least 21 days after the statement closing day. There is no advantage to making a payment before the payment due date. There is, however, an advantage to paying attention to your credit card closing dates. Using two credit cards for day-to-day purchases and timing your purchases correctly can give you the maximum time to pay for purchases. For example, you have two credit cards that you use for day-to-day purchases.
Each month you switch to the card that just closed by starting to use:
By switching cards on closing dates, you give yourself the maximum time before you pay for purchases.
On a credit card closing day each month, the credit card issuer tabulates account activity and sends you an account statement. Each statement has a:
If you pay the statement's new balance amount in full on or before the payment due date, no interest is charged.
If you make a payment that is less than the statement's new balance amount (such as the minimum payment) on or before the payment due date, interest is charged on the new balance amount after your payment has been deducted.
Regardless of the payment amount, when you make a payment after the payment due date, both a late fee and interest on the entire statement's new balance amount are charged.
Late fees and interest are added to a credit card account the same as a purchase transaction. They are included in the new balance amount on following statements and accrue interest the same as purchases.
Missing and making late payments can have a negative impact on your credit score.
Credit card companies charge interest at an exorbitant rate on an account that carries an unpaid balance. The rates vary based on the type of card, your creditworthiness (higher credit score = lower interest rate), and the issuing bank or credit union. Here's a breakdown of typical APR ranges.
| Credit card type | Typical APR range |
| Standard/general | 20%-28% |
| Rewards | 22%-30% |
| Balance transfer | 17%-25% (after the transfer promotion ends) |
| Student | 20%-27% |
| Secured | 18%-26% |
| Store | 25%-30% |
The only way to avoid paying interest is to pay each statement's new balance in full on or before the payment due date every month. The simplest way to do that is to set up automatic payments on the credit card company’s website with the payment set to the statement's new balance amount.
What makes instant borrowing possible are the four major credit card networks:
Credit card networks facilitate transactions between merchants (where you use your credit card) and credit card issuers (the companies that loan you the money). In addition to aiding transactions, credit card networks determine where credit cards are accepted.
Credit card issuers provide cards and credit limits to consumers. Issuers also manage numerous features of credit cards including:
Card issuers also determine how much credit to extend to you and have the final approval on whether a credit card transaction you want to make is approved or denied.
Major credit card issuers include:
Each merchant that accepts credit cards has a merchant account at what is known as an acquirer bank. The merchant’s acquirer account is what allows the merchant to accept credit card payments.
Here’s what happens behind the scenes when you use your credit card to make a purchase. Let’s say you have a Costco Anywhere Visa Card by Citi. When you use the card at Costco, there are four players involved in the payment process: you, Costco (merchant and acquirer), Visa (network) and Citi (issuer).
This digital communication happens almost instantaneously. After approved transactions are completed, they are kept on file by the acquirer bank so that the transactions remain available to the merchant for making changes, such as adding a tip.
Normally after business hours, all stored credit card transactions for the day are processed by the merchant’s acquirer bank with the networks and issuers for the credit cards the merchant took that day. The merchant’s account is credited by the acquirer bank with the net amount of the day’s transactions. The acquirer, networks, and issuers settle money accounts, including assessing processing fees. Credit card transactions are added to consumer accounts by the issuers.
Returning or canceling an item purchased with a credit card generates a refund transaction. Credit card companies process refunds in one of two ways:
Most credit card companies treat returns as partial payments.
Many credit cards allow you to get cash within a specified limit. A cash advance can be taken at an automatic teller machine (ATM), through a bank withdrawal, or using cash advance convenience checks provided by the credit card issuer. An advance from a credit card is a short-term, expensive cash loan that must be paid back.
Cash advances show on credit card statements separate from purchase transactions, but are included in the statement’s new balance amount. Cash advances, normally with an interest rate that is higher than the rate for purchases, are processed and reported separately. While interest is charged on purchase transactions only after a statement balance has not been paid in full, the interest on cash advances starts to accrue on the day the cash is dispensed.
Credit card payments are usually applied to a cash advance balance first because of the higher interest rate. This can result in an entire payment being totally applied to the cash balance with nothing applied to the purchase transaction balance which can mean that interest is being charged unexpectedly for the entire purchase transaction balance.
The best strategy for getting cash advances from a credit card is don’t, unless you have absolutely no other choice.
If a credit card company offers you the opportunity to earn cash back, points, or miles on purchases, the credit card is a rewards card. Rewards cards either provide you with the same number of rewards for every purchase (known as flat-rate rewards) or offer bonus rewards on certain purchase categories such as increased earning rates on dining out, gas, or groceries. You earn rewards on purchases only, not on balance transfers (moving the balance on a credit card to another credit card) or cash advances.
Paying bills with a rewards credit card lets you earn card benefits by paying your bills. The downside of using credit cards to pay bills is that you have to pay the credit card statement’s new balance in full each month to avoid offsetting your rewards by paying interest. If you can pay the full new balance amount consistently, using rewards credit cards to make bill payments can be quite, well, rewarding.
Rewards credit card programs vary as to which rewards are earned, how the rewards are earned, and how the rewards can be redeemed. Do your research to find a rewards credit card that fits you best.
Credit cards are exceptionally vulnerable to being used without your knowledge. You do not have to pay for unauthorized use of your credit card as long as you identify the fraudulent charges and dispute those charges within 60 days after the date of the statement on which the bogus charges first appear. Protecting yourself from credit card fraud requires that you pay attention to the details.
Actions you can take to protect yourself from fraudulent use of your credit cards include:
When a credit card company receives a dispute on a credit card transaction via letter, they are required to investigate. While the investigation is being conducted, you are not required to pay the disputed charge, nor can the credit card company charge interest on the transaction. If the investigation shows that the disputed charge is fraudulent, the charge is deleted from your account.
You can dispute charges online with most credit cards, however, by not sending a letter the credit card company is not obligated to respond.
Credit cards are protected by Federal statute under the Fair Credit Billing Act, but you have to be alert to find and dispute fraudulent charges, by letter, within the 60-day limit. If you don’t, you pay the fraudulent charges and the bad person wins.