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What are Credit Cards?
A form of money (instant spending power) that provides both the capacity to buy goods and services (i.e., carry out transactions) and the capacity to borrow funds (i.e., gain access to credit).
A Brief History of Credit Cards
1. The first credit cards, which go back to the Civil War, were used primarily for convenience in carrying out transactions, so people didn't have to always carry cash or a checkbook around. Retail merchants, such as department stores, gasoline companies, and manufacturers, would issue printed or encoded cards to their best customers who would usually pay off their bill as soon as a statement arrived in the mail.
2. While most early credit cards served a fairly small area and a small number of customers, the idea really began to catch on nationally after the Second World War when oil companies and such prestige card plans as Diner's Club and American Express began in the 1950's to offer the convenience of charging for purchases (such as restaurant meals) and paying a little later. Still, these were not true credit cards because the customer was usually expected to clean up his or her bill right away.
3. Many experts didn't expect these cards to take off like they did because, at first, few merchants accepted them and many customers didn't appear to qualify for the early plans.
4. However, the tremendous growth of the economy and the great pent-up demand for consumer credit after World War II and The Korean War soon led to the appearance of true credit cards – you could buy now and possibly pay much later (i.e., borrow at least a portion of the purchase price of goods and services charged to the card). These newest cards were sometimes called "credit revolvers" because you could charge up to a certain amount, gradually pay the borrowed amount back over time, and then charge the card up again as long as your account remained in good standing and you did not exceed your credit limit.
5. Small card companies gradually gave way to larger companies in what turned out to be a high-cost-industry. You needed a high volume of card usage to cover production and capital costs, credit and crime losses, and still make a profit. Such huge industry leaders as BankAmerica Card (later VISA), Discover, and MasterCard eventually emerged from the pack, adding new features as they absorbed smaller companies, such as more generous customer credit limits (i.e., increased borrowing capacity), rebates when the card was used, the ability to return defective merchandise, and insurance coverage for consumers.
6. By the close of the 20th Century one card issuer, VISA, launched a new variety of card allowing teenagers and other qualified users to spend online the amount electronically entered on the new card, usually by a young person's parent or guardian. However, the parent or guardian setting up this card plan must administer a financial-skills test to young persons given the new card (called Buxx).
Potential Dangers and Risks with Credit Cards
1. Consumers may overuse them because they are so "easy" to use and so readily accepted in so many places. Moreover, credit card offers to households have reached record levels in recent years; more than 25 per family per year, on average.
2. Many consumers think of them as extra income, not debt, but debt is what you take on when you use your credit card.
3. Delay in paying can hurt your credit bureau report (credit rating) and make future borrowing more costly as well as create other problems (e.g., in getting a job or qualifying for insurance coverage). Many people don't realize that credit bureaus scattered around the United States and other countries as well usually have a record of every card account as well as any other borrowing that we take on. When we go to borrow more, a lender may see all of the debt we have already taken on and refuse to make us a new loan.
4. Credit cards commit our future income – will our future income be enough? It's easy to get overwhelmed with credit card debt. U.S. household bankruptcies have averaged more than a million per year in every year since 1995. Moreover, most credit card charges (by dollar volume) are for optional purchases, not necessities.
Good Financial Management Practices with Credit Cards
1. If we are going to be financially successful and learn how to use credit cards without going too far, we need to learn something about personal budgeting.
2. First, each month we need to estimate our "take home" income – what income will be left after deductions for taxes, insurance premiums and other items that normally are automatically withheld from our paychecks?
3. Next, what expenditures for food, shelter, clothing, transportation, medical care, child care, schooling, etc. are we going to have to make?
4. Finally, is there any money left over for savings – be sure to include both emergency savings and long-term savings for retirement, education, etc.
5. Now ask yourself: How would having to pay off credit card balances for items we could do without or paying credit card interest affect our budget? If this amount is too much for our expected net current income, after all living expenses are taken out we need to cut back on credit card usage and limit our charges to a level that our budget can safely handle.
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