How Credit Cards Work

By: Melanie Radzicki McManus  | 
credit card
Credit cards are staple of American life. Boy_Anupong / Getty Images

Have you ever stood behind someone in line at the store and watched them shuffle through a stack of credit cards? Consumers with this many cards are in the minority, but experts say that the majority of U.S. citizens have at least one credit card, and the average number is about four, according to Experian.

It's true that credit cards have become important sources of identification. If you want to rent a car, for example, you really need a major credit card. And used wisely, a credit card can provide convenience and allow you to make purchases with nearly a month to pay for them before finance charges kick in.

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That sounds good in theory. But in reality, many consumers are unable to take advantage of these benefits because they carry a balance on their credit card from month to month, paying finance charges that average nearly 18 percent, but can go up to a whopping 30 percent or more. Many find it hard to resist using the old "plastic" for impulse purchases or things they really can't afford. The numbers are striking: At the end of 2020, American consumers carried $825 billion in collective credit card debt.

In this article we'll look at the credit card — how it works both financially and technically — and we'll offer tips on how to shop for a credit card. Experts say this should be a project on the scale of shopping for a car loan or mortgage. We'll also describe the different credit card plans available, talk about your credit history and how that might affect your card options, and discuss how to avoid credit card fraud, both online and in the real world.

Let's start at the beginning. A credit card is a thin, plastic card, usually 3.37 by 2.13 inches (85.6 by 54 millimeters) in size. The dimensions are set by the International Organization for Standardization. The card contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to their account — charges for which they will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers and bank and internet computers.

According to Encyclopedia Britannica, the use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II.

The first universal credit card — one that could be used at a variety of stores and businesses — was introduced by Diners Club, Inc., in 1950. With this system, the credit card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card was established in 1958 by the American Express company.

Later came the bank credit card system. Under this plan, the bank credits a merchant's account as sales slips are received (this means merchants are paid quickly — something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or smaller monthly installments, with interest (sometimes called carrying charges).

The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.

Other major bank cards followed, including Mastercard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.

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What Credit Card Numbers Mean

The front of your credit card has a lot of numbers — here's an example of what they might mean.
Illustration by Rosaleah Rautert

Although phone companies, gas companies and department stores have their own numbering systems, ANSI Standard X4.13-1983 is the system used by most national credit card systems.

Here are what some of the numbers stand for.

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The first digit in your credit card number, the major industry identifier (MII), signifies the system.

Here are the major MIIs, along with examples of the most popular cards using a particular number:

  • 3 - Travel and entertainment/American Express or Diners Club
  • 4 - Banking and financial/Visa
  • 5 - Banking and financial/Mastercard
  • 6 - Banking and merchandising/Discover

Most consumers will only have credit cards that start with one of these four numbers, unless they have store-specific credit cards, which follow different rules. The structure of the card number varies by system. For example, American Express card numbers start with 34 or 37; Discover with 65, 644, 6011.

A card's MII, plus the five digits following, are called the issuer identification number or the bank identification number. Together, these tell you which credit card company issued the card and what network it belongs to, plus indicate which benefits it carries for the cardholder. For example, the initial digits 414709 mean the card is a Capital One Signature Visa.

The next several digits before the final one, which generally range from seven to 10, comprise your individual account number. And that last digit? It's called the checksum, and lets people or computers know if the number is valid. This helps catch both numbers that are incorrectly entered and fake ones generated by scammers.

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The Stripe on a Credit Card

Your card has a magstripe on the back and a place for your all-important signature.
Illustration by Rosaleah Rautert

The stripe on the back of a credit card is a three-track magnetic stripe, often called a magstripe. The magstripe, which is very similar to cassette tape, contains encoded information about your account via tiny iron-based magnetic particles enclosed in a plastic-like film. Each particle is really a small bar magnet about 20-millionths of an inch long. Information can be "written" on a magstripe because the bar magnets can be magnetized in either a north or south pole direction.

If a magstripe reader — such as those within an ATM or at a checkout — isn't accepting your card, your problem is probably either a dirty or scratched magstripe, or one that has been erased. The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on a refrigerator, or exposure to a store's electronic article surveillance(EAS) tag demagnetizer.

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Once you successfully swipe your card, your potential purchase is authenticated to help ensure it's really you who is using your card, not someone else. There are several types of authentication being used. Gas pumps often require inputting your ZIP code, for example, while online purchases may require a password or a code sent to your cellphone. Sometimes your card may be declined when traveling, as authentication may be based on location. So if you live in Chicago and charge most items in that region, but a charge suddenly pops up from a store in Alabama, that charge may fail to be authenticated.

One of the biggest downfalls to magstripe cards is that skimming devices on readers can capture your information, which thieves can then use to create fake new cards. But don't fret. Magstripes are being phased out of credit cards in favor of the more secure chip-based credit and contactless cards, with Mastercard leading the way. Starting in 2024, most new Mastercard credit and debit cards won't be required to have a stripe, with a complete phase-out by 2033.

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Smart Cards

Smart cards first debuted in France in the 1960s, but didn't take off right away because the cards didn't work with every reader. It wasn't until the 1990s that they became ubiquitous in France and all of Europe, when the global EMV chip became standard for the cards. (EMV stands for Europay, Mastercard and Visa.) The U.S. took much longer to pivot to smart cards, first using them in 2014. As of 2015, all U.S. merchants were required to accept EMV cards

A smart card has a microprocessor, or computer chip, built into it — the EMV chip. This allows it to encrypt its own information and interact with more types of readers. You use a smart card by inserting the chip end into a reader or by contactless payment, which involves holding your card near a contactless-enabled terminal. While many people refer to this latter method as tap-to-pay, you don't have to tap your card against the reader. You simply need to hold it close to the terminal. When you do so, information from your card travels to the reader via short-distance radio frequency. Thus, this method is sometimes called radio-frequency identification technology, or RFID.

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While not all chip cards also offer contactless payment, most contactless cards also come with a readable chip. To figure out if your card offers contactless payment, look for its symbol on the back of the card: four curved lines that get bigger, like a WiFi sign tipped on its side.

Cryptography is essential to the functioning of these cards. The card and the card reader execute a sequence of encrypted sign/countersign-like exchanges to verify that each is dealing with a legitimate counterpart. And once this has been established, the transaction itself is carried out in encrypted form to prevent anyone, including the cardholder or the merchant whose card reader is involved, from "eavesdropping" on the exchange and later impersonating either party to defraud the system. Using the contactless system is faster than chip, swipe or cash payments — it often takes just a second or two.

Besides being secure, smart cards are capable of many kinds of transactions. For example, you can make purchases from your credit account, debit account or from a stored account value that's reloadable. The enhanced memory and processing capacity of the smart card is many times that of traditional magstripe cards, and can accommodate several different applications on a single card. It can also hold identification information, keep track of your participation in an affinity (loyalty) program and even provide access to your office. This means no more shuffling through cards in your wallet to find the right one — the smart card will be the only one you need!

Bluetooth cards such as Fuze are a new form of smart card beginning to emerge. This type involves the Bluetooth radio frequency, and lets you load up to 30 credit card numbers on it, along with their expiration dates and security codes. You can also load debit cards, gift cards, etc. Since Fuze connects to your phone remotely, you can erase the data on it if it's lost or stolen.

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Credit Card Safety

Americans are making some 20 percent of their retail purchases online, for a total of nearly $800 billion in 2020. While e-tailers (electronic retailers) would love these figures to keep climbing, consumers still have some worries about shopping online. Credit card fraud is always a threat, both on the internet and out in the real world. And hackers have found ways to steal credit card numbers from websites.

In 2019, Capital One admitted 100 million of its credit card applications were accessed by hackers, resulting in an $80 million fine. These are the kinds of stories that deflate consumer confidence in online credit card use. While internet companies and businesses with an online presence have taken responsibility for security breaches and resulting losses to credit card users, there's also the problem of identity thieves who use stolen credit cards to make online purchases. And while unfair or fraudulent practices by credit card companies are not commonplace, they do happen.

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The good news is that consumers are protected by law. In the case of credit card fraud online or off, federal law limits your liability to a maximum of $50 of the amount stolen. Often, you don't have to pay a dime.

There are also a lot of simple steps you can take to protect yourself and your credit card. Here are several.

  • When shopping online, go directly to the merchant yourself. Don't click through from an email, no matter how official-looking, as it might be a phishing scam.
  • When you use your card at an ATM, enter your PIN in such a way that no one can easily memorize your keystrokes.
  • Don't throw out credit card statements or receipts without first shredding them.
  • Authorize two-step authentication on your credit card account. This way if someone gets your account login, they won't be able to access more account information.
  • Ignore any credit card offer that requires you to spend money upfront or fails to disclose the identity of the card issuer.
  • Make certain you get your card back after you make a purchase. One practice to help you remember: Leave your wallet open in your hand until you have the card back. Also, make sure that you personally rip up any voided or canceled sales slips.
  • Always keep a list of your credit cards, credit card numbers and toll-free numbers in case your card is stolen or lost.
  • Check your monthly statement to make certain all charges are your own, and immediately notify the card issuer of any errors or unauthorized charges. (More on this later.)

When you're applying for a credit card, make sure to pay close attention to the application form. Some forms provide a box that you can check to allow or disallow the selling of your information to mailing lists. You can also protect yourself by taking your name off the major credit bureaus' mailing lists.

One way to do this is to visit The Consumer Credit Reporting Industry Opt-Out Prescreen website, run by Experian, Equifax, TransUnion and Innovis, the four major consumer credit bureaus. On this site you can fill out a form and opt out of receiving pre-approved credit or insurance offers in the mail for a five-year period. You can also call 888-5-OPT-OUT (888-567-8688). If you'd like to permanently opt out, you must do so by mailing in a form that you can access online or request over the phone. When you write to these companies, you'll need to provide your complete name, mailing address, date of birth and Social Security number.

The Direct Marketing Association (DMA) also tracks consumers who prefer not to receive solicitations by mail or phone. Check their Consumer Assistance site for more information.

Next, let's look at all of the fine print that comes on credit card applications. What is it really saying?

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Credit Card Applications

Before we get into shopping for a card, let's go over some important terms you'll encounter in credit card brochures or discussions with potential lenders.

  • Annual fee. A flat, yearly charge similar to a membership fee. Many companies offer cards with no annual fee and lenders who do charge annual fees may waive them to keep your business.
  • Finance charge. The dollar amount you pay to use credit. Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender. You generally pay higher interest on cash advances than on purchases; check your latest bill to find out what you're paying for this service.
  • Grace period. A time period, usually about 25 days, during which you can pay your credit card bill without incurring a finance charge. Under almost all credit card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
  • Annual percentage rate (APR). The yearly percentage rate of the finance charge. Interest rates on credit card plans change over time. Some of these adjustments are tied to changes in other interest rates, such as the prime rate or the Treasury Bill rate, and are called variable-rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed-rate plans.
  • Fixed rate. A fixed annual percentage rate of the finance charge.
  • Variable rate. Prime rate (PR), which varies, plus an added percentage. For example, your rate may be PR + 3.9 percent.
  • Introductory rate. A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate. This is a hot topic — more about it later.

Experts say that if you're smart, you'll do the same kind of comparison shopping for a credit card that you do when you're looking for a mortgage or a car loan. This is a good idea because the choices you make can save you money. The process is not a simple one, so here are some tips to help you get started.

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Do some research. There are plenty of places, both online and offline, where you can read about credit card offerings and even get credit card ratings. But since rates and plans change so often, it's a good idea to call the institutions you're interested in to confirm the information and to see if there are other plans that might work for you. A reliable and non-commercial resource is the Federal Reserve Board. Also, a lot of companies such as NerdWallet and Bankrate offer expert credit card reviews and recommendations.

Make a list. Make a list of credit card features that fit your financial needs and rank the features according to how you plan to use the card and pay your monthly bill.

Review the plans. Review all of the information you've gathered on different plans. Pay special attention to the APR — you want a low rate, but not necessarily the lowest. This is because, depending on your lifestyle and payment habits, you might benefit more from a card that offers cash rebates, discounts or frequent-flier miles.

Check out credit unions. Look into the possibility of joining a credit union. Credit unions are nonprofit and they have lower overhead so they can charge lower interest rates. Credit unions are newer to the credit industry, so they may be eager to generate credit card loans. However, you'll probably be required to open a share account or savings account to join. Credit unions typically are limited to a particular employer and its employees, but that's changing. Due to industry consolidations, credit unions are rapidly expanding their fields of membership. To find out which credit union you may be eligible to join, contact the Credit Union National Association (CUNA).

Compare plans. If you already have a credit card, be sure that you're making a good move before you swap cards. If you are a current cardholder and have a good credit rating, see if the institution that issued your card will lower your current rate. Don't be afraid to negotiate.

These are steps to take when deciding on a credit card. But your actual breadth of options depends in great part on your credit history.

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Credit Ratings and Card Types

If you've had credit problems, you might have to settle for a credit card with a slightly higher interest rate. If you have poor credit or no credit, some banks will issue you a secured credit card. This means that you deposit money into a savings account that acts as collateral against your credit line. A secured credit card's interest rate and/or associated fees may be high, but it offers you the convenience of a credit card while you work on rebuilding your credit. Secured cards are often the best option available to those with a bankruptcy in their past. Be sure to choose a secured card that pays you interest on your deposit.

If you have a very good credit score and would like a higher spending limit or extra perks, check into applying for a gold card or platinum card. These cards often carry steep annual fees (Amex's platinum card cost $695 per year in 2021) and may require you to pay off the balance in full every month. But depending upon your circumstances, the extra perks you receive for these fees may be worth it. Perks may include earning points on purchases toward a rewards program or even dining credits.

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With all of this money getting spread around, and lots more of it out there, it's no wonder why most of us are constantly receiving notice that we're "pre-approved" for an endless stream of credit cards. There's got to be a catch ...

Sometimes there is, and it goes like this. Let's say you get an offer for a new credit card account with a pre-approved credit limit just slightly higher than the balance on your current card. The fine print many of us ignore could reveal an extremely high interest rate, plus a notation that by accepting the offer, you agree to transfer the entire balance of your other credit card account to this new, high-interest account.

Obviously, you don't want to pay more interest each month, so always read all of the details before signing on. And before you toss one of these offers into the garbage, shred it so that no one can fish it out and try to impersonate you.

No matter what kind of card and plan you choose, you should have access to the following information under the federal Truth in Lending Act so that you can compare one loan to another:

  • Finance charges in dollars and as an annual percentage rate (APR)
  • Credit issuer or company providing the credit line
  • Size of the credit line
  • Length of the grace period, if any, before payment must be made
  • Minimum payment required
  • Annual fees, if applicable
  • Fees for credit insurance (if any), which pays off your loan if you die before the debt is fully repaid
Card Types

There are three basic types of credit cards:

  • Bank cards, issued by banks (for example, Visa, Mastercard and Discover Card)
  • Travel and entertainment (T&E) cards, such as American Express and Diners Club
  • House or store cards, which are good only in one chain of stores or gas stations (think Sears, Shell, etc.)

T&E cards and national house cards have the same terms and conditions no matter where you apply.

You may also be familiar with what is known as an affinity card. This card — typically a Mastercard or Visa — carries the logo of an organization in addition to the lender's emblem. Usually, these cardholders derive some benefit from using the card — maybe frequent-flyer miles or points toward merchandise. The organization solicits its members to get cards, with the idea of keeping the group's name in front of the cardholder. In addition to establishing brand loyalty, the organization receives some financial incentive (a fraction of the annual fee or the finance charge, or some small amount per transaction, or a combination of these) from the credit card company.

No one card is right for everyone. Basically, the right card for you is one that's accepted where you shop and charges you the smallest amount of money for the services you use. Almost any U.S. business or establishment that takes Mastercard also takes Visa, and vice versa. So if you only spend money in the United States, you probably don't need both.

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Credit Card Plans

credit card plan terms
This chart depicts how APR, finance charges and annual fees can add up.
HowStuffWorks 2008

Now we come to the core of the credit card selection process — which plan to choose. The costs and terms of your credit card plan can make a difference in how much you pay for the privilege of borrowing (which is what you're doing when you use a credit card).

If you always pay your monthly bill in full, the best type of card is one that has no annual fee and offers a grace period for paying your bill before finance charges kick in. If you don't always pay off your balance each month (and the majority of American cardholders fall into this category), be sure to look at the periodic rate that will be used to calculate the finance charge.

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One of the major factors to consider in a credit card plan is whether it has a variable or fixed interest rate, as this can have a significant impact on what you pay to use your card.

Fixed-rate credit cards, which are generally only offered by credit unions and smaller banks, carry an interest rate that's not tied to the economy. The rate generally stays the same, although it may change based on your payment history and other factors. Since the rate is more predictable, you will have the advantage of knowing what your bill will be every month. Should your card issuer decide to raise the rate, the Truth in Lending Act requires the lender to provide at least 15 days'notice. In some states, there are laws that require more notice.

Credit cards with variable rates tie the interest rate to indices such as the prime rate; the one-, three- or six-month Treasury Bill rate; and the federal funds or Federal Reserve discount rate. Because they're tied to the economy, they can change over time. The card issuer doesn't have to notify you of rate changes.

Some financial analysts argue that because a fixed rate can be increased with only a 15-day notice, this plan is not that different from a variable-rate plan, which is subject to change at any time. They advise looking closely at both plans. If you do choose a variable-rate card, check to see if there are caps on how high or how low your interest rate can go. If the lowest variable rate possible on your card, for example, is 15.9 percent, and rates are trending downward, you may want to switch your card to another lender.

In addition to the interest rate, make sure to check out the terms listed in the issuer's disclosure form (usually a small, fine-print brochure). Specifically, look for the information on late charges and over-limit fees. Late fees may run as high as $29 the first time you're late making a payment (as of Jan. 1, 2020, federal law stipulates they can't be any higher), and up to $40 for subsequent infractions. And while over-limit fees are declining in usage, they may add another $25 or so to your bill.

Regardless of which card and plan you choose, you're going to be making payments. Let's take a look at how this is done.

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Monthly Payments and Finance Charges

Credit card application
Whether you fill out an application for a credit card on paper or online, there are certain terms you need to know. courtneyk/Getty Images

Some credit cards require you to pay off all of your charges each month. As a benefit, they may offer no finance charge, and sometimes no maximum limit. (These might be more properly called charge cards.) Some types of American Express cards still use that model.

Most cards, including Visa, Mastercard and Discover, offer what is known as revolving credit. This means they let you carry a balance, on which they charge interest (finance charges), and they require you to make a minimum payment. The minimum payment is calculated differently by each card issuer. For example, Capital One charges either $25 or 1 percent of your new balance, plus interest (whichever amount is higher). Citibank, in contrast, charges whichever amount is higher: $35, or 1 or 1.5 percent of your new balance (depending on various circumstances, such as the terms of your credit card).

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Here are three ways financial institutions calculate finance charges:

  • Adjusted balance. This system, which consumer experts say favors the cardholder, takes the balance from your previous statement, adds new charges, subtracts the payment you made and then multiplies this number by the monthly interest rate.
  • Average daily balance. This method, which is a pretty even-handed one and the most commonly used, works like this: The company tracks your balance day-by-day, adding charges and subtracting payments as they occur. At the end of the period, they compute the average of these daily totals and then multiply this number by the monthly interest rate to find your finance charge.
  • Previous balance. This method generally favors the card issuer, according to consumer experts. The issuer multiplies your previous statement's balance by the monthly interest rate to find the new finance charge. This means you're still being charged interest on your balance a whole period after you've paid it down!

What you pay will vary depending on your balance, the interest rate and the way your finance charge is calculated. Here's an example that shows how much difference the interest rate can make in what you actually end up paying:

  • High-rate card: Suppose you charge $1,000 on a 23.99 percent credit card. After that, you make no further charges and pay only the minimum each month. The payment will start at $51 and slowly work its way down to $10. You'll make 77 payments over the next six years and five months. By then, you will have paid $573.59 in interest for your credit privilege.
  • Low-rate card: If you charge that same $1,000 on a 9.9 percent fixed-rate card, the minimum monthly payment will start at $50.41 and go down to $10. You'll make 17 fewer payments, finishing in six years and paying $176 in interest. This saves you almost $400.

Late fees are used by pretty much all credit card issuers now. And increasingly, issuers are drastically raising interest rates (to as high as 29.99 percent) after a set number of late payments. Unfortunately, once you have a couple of late payments, the credit card company can charge you the inflated interest rate for the remaining life of the account. Try to avoid this — all credit card companies report your payment record to credit-reporting agencies, and even a few late payments could cause you problems when you try to buy a car or a house.

And as most of us know, even credit card companies make mistakes. The next section discusses how to make sure you're paying only what you owe.

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Credit Card Billing Errors

One way to avoid billing errors and unjustified fees is to carefully go through your monthly credit card statement, making sure all the transactions are legitimate and that other charges — finance charges, late fees, etc. — are justified. Many times, a simple call to the credit card company will solve the problem.

If the credit card issuer doesn't agree there was a billing error, unjustified fee or other problem, you can use the Fair Credit Billing Act for assistance. Here's how to do so.

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  • Write to your card issuer or creditor within 60 days after the first bill containing the disputed charge is sent to you. (Even if more than 60 days has passed since you were billed for the item, you still might be able to dispute the charge if you only recently learned about the problem.)
  • In the letter, give your name, account number, the date and amount of the disputed charge, and a complete explanation of why you are disputing the charge.
  • Send your letter to the address provided on the bill — do not send the letter with your payment. (To be sure that your letter is received and that you will have a record of its delivery, you might want to send it by certified mail, with a return receipt requested.)
  • If you follow these steps, the creditor or card issuer must acknowledge your letter in writing within 30 days after receipt and must conduct an investigation within 90 days. While the bill is being investigated, you don't have to pay the amount in dispute. (The creditor or card issuer is not allowed to take action to collect the disputed amount, report the amount as delinquent or close or restrict your account during this time.)
  • If it is determined that there was an error or that you don't owe the amount you're being held responsible for, the card issuer must credit your account and remove any finance charges or late fees relating to the amount not owed. For any amount still owed, you have the right to an explanation and to copies of documents that prove you owe the money. If the bill is correct, you must be told in writing what you owe and why. You will owe the amount disputed plus any finance charges.

There are a number of nonprofit and noncommercial organizations that provide credit information and assistance to consumers, such as the National Consumer Law Center.

So, now that you know all this, let's find out what it takes to qualify for a credit card in the first place.

There's no way to know if you'll qualify for a credit card without doing some research. Some of the basic things that lenders look for include:

  • Good payment record. If you pay your bills on time, you'll score major points with lenders. If you have a lot of late payments, this can hurt your chances of getting a card. And even if the lender decides to issue you a card, it's probably going to have a higher interest rate.
  • Control of debt load. Lenders generally want to see that you are a good credit risk and that you aren't living beyond your means. Experts say that nonmortgage credit payments each month should not exceed more than 10 percent to 15 percent of your take-home pay.
  • Signs of stability, responsibility. Lenders perceive things such as longevity in your home and job (at least two years) as signs of stability. Having a respected profession doesn't hurt, either.
  • Lack of credit inquiries. This one is a little strange. Whenever you apply for a credit card, the lender pulls your credit report from one or more of the major bureaus as part of the approval process. Each time a report is pulled, it's marked as an inquiry and stays on your credit bureau report for two years. Lenders perceive several inquiries on your report as indications that you're scrambling for loans and may consider you a poor credit risk. So, in order to beat this system, don't allow every credit card issuer you speak with to pull your report.
  • Lack of available or unused credit. Did you know that having credit cards that you don't use — and have a zero balance on — can hurt your credit? The rationale here, experts say, is that if you have all this available credit lying around, you could run it up at any time (even if you never have). Get rid of the cards you don't use. Be sure to ask the credit reporting bureaus to remove the discarded cards from your report, noting that you, not the creditor, closed the account.

Once you qualify for a card, or several cards, there's always the chance that you'll end up spending more than you've got. A pretty good chance, actually. The next section discusses what you can do if you find yourself in credit card debt.

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Getting Rid of Credit Card Debt

If your credit card balance has crept up to uncomfortable levels, you're not alone. Millions of Americans have learned the hard way how easy it is to use and abuse their credit cards, and how difficult it can be to pay them off. Here are some credit card debt elimination tips.

  • Always be aware of all of the fees that may be associated with your credit card. Know the annual fees, current interest rates, finance charges, cash-advance fees and any other fees tied in with your card. This knowledge can help you make better decisions on how to manage your card.
  • Cash advances can be trouble. You should only get cash advances when it is absolutely necessary. Higher interest rates than you're paying for card purchases are usually charged, and most banks also charge a service fee related to how much cash you're withdrawing.
  • Always be on the lookout for cards that offer lower interest rates. Transferring balances from one card to another to take advantage of low introductory rates is a common practice among U.S. cardholders. Low introductory rates can be very helpful in your quest to become free of credit card debt. You should look for credit cards that offer a low intro rate (usually for six months), and transfer the balance from your previous credit card to that credit card. Before you take this step, however, make sure that once the intro rate expires your new card will offer the same (or lower) interest rate as your current card.
  • Pay more than the minimum required payment. Experts say that making minimum payments is one of the most common mistakes consumers make. You will save lots of money on interest and get to debt-free goals sooner if you pay more than what is required each month.

It's true that it's really easy to fall into the credit card trap, and not so easy to get out. But don't give up. There are nonprofit centers across the country that provide debt counseling and will even (at no or low charge) contact your credit card company and try to get your rate lowered or a different payment plan worked out.

For more information on credit cards and related topics, check out the links that follow.

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