5 Things You May Not Know About Credit Cards

5 Things You May Not Know About Credit Cards

With credit cards, consumers typically hear about rewards programs, airline miles, debt and interest charges. However, there are plenty of things you probably didn’t know about credit cards.

For example, credit cards can be completely free if you use them properly. But credit cards are never free for merchants, who must pay a fee to the credit card issuer each time a consumer swipes the card. 

Let’s explore five critical details about credit cards:

1. A Credit Card is a Loan

This may be obvious, but a credit card is a loan. Any time you use the card for purchases, you’re not paying the merchant – the bank behind the credit card company is.

The credit card issuer will then send you a list of all your expenditures and require full payment of that amount. The term “buy now, pay later” sums up exactly how credit cards work.

If you don’t pay back that entire balance, that’s when the credit card complexities kick in. For example, interest charges will accrue if you don’t pay the full balance. Interest rates on credit cards can be as high as 20% or more. So the $1,000 you spent over the past month on groceries, new shoes, bus fare and airline tickets to Europe could easily snowball to $2,000 in a matter of months thanks to interest.

2. Credit Cards Have Credit Limits

There is a maximum amount of money you can charge on the credit card. This amount is called a credit limit. If you have strong credit with a long history of little debt and on-time payments, you’ll likely be awarded a higher credit limit.

It’s important that you don’t exceed the credit limit. Sometimes your purchase will be denied if you exceed the credit limit (i.e. if you try to charge $6,000 on a credit card with a $5,000 credit limit.) Other times, the purchase will be approved, but you’ll be slammed with a fee. Check with your credit card issuer for its credit limit policy.

Not to mention, exceeding the credit limit isn’t good for your credit score, as it shows that you’re hungry for credit and it may signal that you don’t have the funds to adequately payoff your debt balance.

Credit cards have a credit limit
Credit cards have a credit limit so you can spend now and pay later, but be careful not to max out your card

3. Credit Card Minimum Payments Are Regulated

Credit card minimum payments are so low, they’re essentially calculated to keep you in debt.

What you may not know, is that the Credit CARD Act of 2009 instituted new rules to make sure consumers are aware of the dangers of simply paying the minimum payment.

The law said that the credit card company must disclose exactly how much money in interest you’ll owe if you only make the minimum payment. The card issuer also must disclose how many years it will take to become debt free if you only make the minimum payment.

For example, let’s say you have a $2,000 credit card balance with a 20% interest rate. If you only pay the minimum payment, it’ll take you over 15 years to get out of debt. On top of that, you’ll pay almost $3,000 in interest payments. That’s more than your original credit card balance!

If you invested this $3,000 in an exchange traded fund, for example, that tracks the broader stock market, you would be making a significant dent in boosting your retirement savings. Why hand that money to the credit card issuer?

You should aim to payoff the entire credit card balance in full each month. This is the “total balance” line on your credit card statement. Ignore the minimum payment. If you can’t pay the entire balance in full, pay as much of it as you can.

4. Credit Cards Aren’t Always Free

For the most part, credit card usage is free in the sense that you don’t have to pay the credit card issuer every time you swipe the card. Many credit cards charge an annual fee, however. They can be as low as $95 (which isn’t that low) or as high as $495.

In fact, some consumers can be misled, as many credit cards will waive the annual fee for the first year of your new credit card, but charge the fee for each year after that.

Only a few credit cards have no annual fee for the entire life of the credit card. These are the types of credit cards you should have. Why pay a fee just to own a credit card?

In some cases, a higher annual fee results in more substantial rewards programs, such as free access to an airport lounge or waived baggage fees on some airlines. But if you’re not a frequent traveler, it may not be worth paying the annual fee to receive these perks.

Many credit cards have an annual fee
Many credit cards have an annual fee so make sure the benefits and rewards you earn offset the fee

5. Retailers Pay a Fee Every Time You Swipe a Credit Card

Even though consumers don’t pay a fee after swiping a credit card, the merchant does. These are called interchange fees and are a vital source of revenue for credit card companies.

The thinking is, the credit card issuer is providing a vehicle for the consumer to spend more money, which benefits the merchant. Plus, when a consumer pays with a credit card, the store doesn’t have to worry about not receiving the money, as would be the case if the consumer had paid with a check. In that case, the merchant may have to worry about the possibility of a bounced check. Certainty of payment, from the merchant’s perspective, may be worth the interchange fee.

A typical interchange fee is 2% on the transaction value. So if you’re buying a $500 television, the retailer will pay roughly $10 to the retailer. This is why smaller businesses will not accept credit cards unless the transaction value is above a certain level, usually $10 or $15. If you’re buying a $3 pack of gum, the merchant generally won’t accept a credit card amid concerns that the interchange fee will eat into the store’s profit margin. Some $33.8 billion in interchange fees was paid by merchants in 2016, according to research firm Moebs Services.

Credit Cards You Might Be Interested In

1
Discover it® - Cashback Match™
Discover it® Miles Card
How to apply
To apply for this offer please contact
Discover Bank
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INTRO APR on Purchases
25.99% Variable±
INTRO apr on Balance Transfer
0% intro APR for 14 months from date of first transfer, for transfers under this offer that post to your account by March 10, 2018
Regular APR
11.99% to 23.99% Variable±
Annual Fee
$0
Rewards Program
Cashback Bonus®
Bonuses & Rewards
  • % 5% in rotating categories each quarter like Gas, Dining, Amazon.com, Wholesale Clubs and more
  • % 1% on Travel
  • % 1% on Groceries
  • % 1% on All Other Purchases
  • Up to 5% cash back offer
  • Discover automatically matches all the cash back you earn dollar for dollar at the end of your first year
  • No Foreign Transaction Fee
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2
Venture® Rewards Credit Card
Discover it® Miles Card
How to apply
To apply for this offer please contact
Capital One®
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INTRO APR on Purchases
23.99% Variable±
INTRO apr on Balance Transfer
N/A
Regular APR
13.99% to 23.99% Variable±
Annual Fee
$0 first year, then $95
Rewards Program
Venture® Rewards
Bonuses & Rewards
  • 2x Miles on Travel, Dining and Car Rental
  • 2x Miles on Gas
  • 2x Miles on Hotels
  • 2x Miles on All Other Purchases
  • 50,000 bonus miles after you spend $3,000 on purchases within the first 3 months
  • No Foreign Transaction Fee
  • + No cap to the amount of rewards you can earn
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3
Barclaycard Arrival Plus™ World Elite MasterCard®
Discover it® Miles Card
How to apply
To apply for this offer please contact
Barclaycard
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INTRO APR on Purchases
26.24% Variable±
INTRO apr on Balance Transfer
0% introductory APR for the first twelve billing cycles following each balance transfer that posts to your account within 45 days of account opening
Regular APR
16.99% to 23.99% Variable±
Annual Fee
$0 first year, then $89
Rewards Program
Barclaycard Arrival Rewards
Bonuses & Rewards
  • 2x Miles on Travel, Dining and Car Rental
  • 2x Miles on Gas
  • 2x Miles on Hotels
  • 2x Miles on All Other Purchases
  • 40,000 bonus miles after you spend $3,000 in the first 90 days
  • 5% miles back to use toward your next redemption, everytime you redeem
  • No Foreign Transaction Fee
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4
Costco Anywhere Visa® Card by Citi
Discover it® Miles Card
How to apply
To apply for this offer please contact
Citibank
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INTRO APR on Purchases
26.24% Variable±
INTRO apr on Balance Transfer
N/A
Regular APR
16.24% Variable±
Annual Fee
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Rewards Program
Costco Cash Rewards
Bonuses & Rewards
  • % 4% on Gas
  • % 3% on Dining and Travel
  • % 2% on All Other Purchases From Costco
  • % 1% on All Other Purchases
  • 3% of each transaction in U.S. dollars
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