Credit Cards: The Basics

This post is the beginning of a series on using, avoiding abuse of and getting out from under credit cards.

Do I need a credit card?

Short answer: No.

Financially sound answer: Yes.

If I do not need it, why would I get one?

credit cardsA credit card adds layers of security both for you and your creditors.

For you, there is a safety net of money available to you in the event of an emergency or when you wish to purchase something before you can afford to pay cash. Your credit card is your promise you will pay for your purchase. You are borrowing the money from the credit card issuer, who pays the merchant for your purchase immediately.

This is the exact same concept as taking out a loan at a bank. You have just filled out the paperwork in the credit card application. The difference is when you pay off what you owe, you do not have to re-apply to have access to money again. A set amount of credit is offered to you. As you pay down your debt, you have more credit available without any additional action on your part.

For your creditors, it holds a history of your financial responsibility. Credit card companies are diligent in reporting your financial activity on your credit report every month. When an institution (like an auto finance company) pulls your credit report, your payment history is displayed. That history shows your ability to keep your commitment to pay or your lack of financial responsibility.

Can I get any credit card?

No. Different cards are offered to you based on your credit history.

  1. Pre-paid or secured credit cards: Your lack of credit history or bad credit record make you too high-risk for a traditional card. You must pay in advance for the credit. You secure your credit with your own money, instead of the bank securing your card.
  2. Low limit credit card: You have been extended less than $1,000 credit. Either your credit score is low or you do not have either enough available credit or long enough credit history to be granted a higher limit card.
  3. Traditional credit card: This card carries a limit between $1,000 and $10,000.
  4. Platinum or high limit credit card: These cards have limits up to $100,000.
  5. Unlimited credit card: The extension of credit is conditional. Traditionally, these cards require full payment on the due date. Your credit needs to be impeccable to get this card.

Before we delve into the strings attached (beyond just having to pay the money back to the credit card issuer), take the poll.

Which credit card do you think is the best one for you and why?


© Red Dwyer 2011
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  1. Interesting post! We use credit cards, but ALWAYS pay the entire balance every month. We also have a small “fun” fund. At the beginning of the month we withdraw a small amount of cash. ALL entertainment (including soda, wine, movie rentals ect) purchases are made with cash only. When we run out of cash…we’re out! We’ve noticed that this has decreased our spending a lot. There’s something psychological about actually spending cold, hard cash rather than whipping out the credit card. Like the poll!

    • Great practice! I can offer one tip to you…when you get the cash, only get large bills. You are less likely to break a fifty than you are a five.

      While researching this post, I polled some colleagues, who graciously shared confidential information with me about their traditional cards. When I crunched their numbers, I got an average a bit over $260 per year in interest. I can think of 260 things I would rather spend my money on than interest.

      I have not paid interest on a card in so long, I am no longer required to keep the records…they are that old. Paying off your credit card every month (or two or three times in a month…this is another post in the series) is by far the smartest use of your credit!

  2. Luckily I don’t have a credit card anymore, I paid it off ages ago and I don’t want another one 🙂 lol No I wasn’t in dire straits with it, indeed I was always very good with it and only used it basically for emergencies and they are excellent for that I must admit, however there is always that temptation to buy things even when one does not require them and so I decided to get shut of it and rely on what I can afford, I can have without credit, which works just as good me thinks 🙂

    Have a wondrously fine day today Red, it is raining Skeletons and Zombies here at the moment, well you might have heard the expression raining Cats and Dogs? Well I have to be a tad different now don’t I my great friend 🙂

    Androgoth XXx

    • You are correct about only getting those things you can rightly afford. It is a healthier attitude toward money. Do keep the credit card open, even if you do not use it. The length of your account weighs heavily in your favor, even when you do not use it.

      Stay clear of the falling body parts, my fine friend 😉

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