Introduction
Using credit cards has become quite a common practice for past few decades.
By 2015 the number of Visa credit cards circulating in the world including the U.S. is 850 million (Visa Inc., 2015, para. 6); the average number of credit cards adopted by cardholders in 2009 was 3.7 (Foster, 2011, p. 13). The reasons for popularity, principles of operation, as well as advantages and disadvantages of credit cards, are to be discussed in the report.
Definition and types of credit cards
The definition of credit card provided by O’Sullivan and Sheffrin (2000) is “a card entitling its holder to buy goods and services based on the holder’s promise to pay for these goods and services” (p. 261). It means that not a customer, but the bank pays for the goods at the moment of purchasing, thus providing the customer with a loan, but later the customer has to pay the bill sent by the bank that includes both the price of the goods and the interest – a price for the borrowed money. Interest is a payment to a bank for providing a customer with a loan service. Nowadays banks issue a vast majority of credit card types, providing clients with a broad specter of opportunities. The most common are standard credit cards that have revolving credit lines; reward cards, that provide the customer with perks like cash, discounts or points; secured credit cards, that are used to reestablish credit; and specialty credit cards that are typically applied while sharing partnership between organizations or associations. Before issuing a credit card, the bank learns customer’s credit history that can be achieved from “one of the three credit bureaus – Equifax, Experian and TransUnion” (Yuille, n.d., para. 2). They also review the FICO credit score that is customer’s credit rating.
Advantages and Disadvantages of Credit Cards
Credit cards provide a customer with several advantages. The confidence of purchases allows not carrying large amounts of cash. The protection of costs spent is suitable when a customer needs to proof the act of buying something or receiving a certain service. In that case, the record can always be outdrawn from the bank. Low-cost loans and a possibility of getting instant cash in the times of urgent need is also an important advantage. The perks provided by reward cards can save costs when buying plane tickets, technics, automobiles, etc. Secured credit cards can help a client to build positive credit thus improving his or her credit history. The application in a case of emergency, if the car is broken, and you urgently need costs to rent another one, or in case of sudden illness, is also an important benefit credit cards provide.
Together with certain benefits, using credit cards has several disadvantages as well. A client can easily spend beyond his or her means. Regular checking of papers and another bank documentation is strongly recommended, it is “a good way to ensure that you haven’t been overcharged” (360 Degrees of Financial Literacy, n.d., para. 2). There is a high possibility to pay high-cost fees in case of missing a payment of carrying a balance. Moreover, the interest rates, as well as the annual fees, paid to a bank, can be higher than the client would like them to be. According to the data of 2015, the average APR on a credit card that is a numerical representation of bank’s interest rate was 13.49% (Federal Reserve Statistical Release, 2015, para. 2). A client also has to be careful paying attention to low introductory rates, as they are often limited in time and one day can raise unexpectedly.
The popularity of credit cards is easily explained by a relative easiness of their achievement, and availability of money when one needs it. That definitely is a serious advantage. Nevertheless, a customer also has to know how to manage his or her costs as well as to search for the better service conditions and lower fees the bank can provide. Otherwise, he or she can find himself or herself in a difficult situation having large debts.
References
360 Degrees of Financial Literacy. American Institute of CPAs. (n.d.). Advantages and Disadvantages of Credit Cards. Web.
Federal Reserve Statistical Release. (2015). Web.
Foster, K., Meijer, E., Schuh, S., & Zabek., M. (2011). The 2009 Survey of Consumer Payment Choice. Web.
O’Sullivan, A., & Sheffrin, S. M. (2000). Economics: Principles in Action. Upper Saddle River, NJ: Prentice-Hall Incorporated.
Visa Inc. Fiscal First Quarter 2015 Financial Results. (2015). Web.
Yuille, B. (n.d.) Credit Cards: Types Of Credit Cards. Web.