Credit Cards 101

You probably already know that plastic makes the world go ‘round – the financial world, at least.  But how much do you know about how debit and credit cards really work?

After you have read the following paragraphs, test your knowledge by taking our Plastic Card Quiz! Let us begin…

Credit Cards 101
Once you apply for your first credit card, you will only owe money if you use the card to purchase something.  Your monthly bill will have a minimum payment, or you can opt to pay off the balance in full.  Paying off the balance means you will not be charged interest every month.

Many credit cards have a grace period.  A grace period is the time during which you can pay your credit card bill without having to pay a finance charge.  It is like the card company is loaning you money free for a typical time period of 25 to 30 days.  Remember:  If you do not pay your credit card bill in full each month, you will not be allowed a grace period.

How Interest Works

Interest is the not-fun part of owning a credit card.  The higher your interest rate, the more your purchases will cost you, if you do not pay off the bill in full (Remember that grace period we told you about earlier?).

For example, let’s say you have a credit card with a sky-high interest rate of 24%.  You decide to purchase $2,000 in stereo equipment with your card.  If you pay only $60 per month on your bill, you will end up paying more in interest than you paid for the stereo!  This is why paying more than the minimum payment is so important: you will get out of debt faster and pay less in the long run.

Important Credit Facts

The average U.S. household has about $8,650 – $9,300 in credit card debt, according to ABC News.  The Federal Reserve has also found that collectively, U.S. citizens carry a whopping $800 billion in credit card debt.

Each cardholder in the U.S. has about seven credit cards – three bank credit cards and four store or gas credit cards, according to  This can total approximately 16-20 cards per household!  Now that is a lot of plastic.

Debit vs. Credit

Now let’s talk about debit ATM cards.  Although they look like credit cards, they are very different, because they’re tied to the money in your checking account.  You can use an ATM card to access your checking account only at an ATM.  This makes it easy to get cash whenever you need it.  An ATM card is solely an ATM card and cannot be used at a store.  With an ATM card, would-be thieves must know your PIN (Personal Identification Number) to access your account.   This makes it harder for anyone but you to access your cash.

Signature-based debit cards can be used at ATMs with a PIN or at stores that accept debit cards.  There are two ways to check out with this type of card:  Either choose “credit,” then sign the receipt, or choose “debit,” then enter your PIN.  When  you make a purchase using your signature-based debit card, the money is taken out of your checking account immediately.

Credit & Debit Card Identity Theft Tips

You can protect your credit and debit card accounts from scammers in a number of easy ways.  Here is what do to keep the crooks at bay:

  • Whenever you receive mail that has sensitive personal information on it, such as your social security, driver’s license or account numbers, always shred it before putting it in the trash.  Thieves sometimes “dumpster dive” or steal mail in order to obtain these kinds of documents, and then use the information to create fake accounts and go on shopping sprees.
  • Are you moving?  Always have your mail forwarded to your new house or apartment to prevent sensitive documents from landing in the wrong hands.
  • When you are out and about, only carry the cards that you need for the day.  Always leave your social security card and birth certificate at home.  If your wallet is stolen, thieves can use this information to create phony documents or accounts in your name.
  • After you receive your credit or debit card statement in the mail, always check to be sure the list of transactions is accurate.  If there are transactions on the bill that you did not make, you can dispute the charges with your card company.

What If My Credit Card Is Stolen
If your credit card is stolen and a thief uses it to make purchases in your name, do not panic – you have two months after receiving your bill to contact your credit card company and dispute the charges.  However, as soon as you become aware of the theft, report it to the credit card company immediately and cancel your card.  This can help prevent future theft.

One Common Scam
Another common way thieves attempt to steal your personal information is by sending you an email that requests you visit a website and enter sensitive date, such as your social security number, account information or PIN.  These emails may appear legitimate, so be careful.  Never click a link in an email – instead, type the website URL into your web browser’s address box.  This way, you will avoid visiting phony web pages designed by scammers who are trying to trick you into entering your account information.
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