The Benefits and Risks of Using Credit Cards or Card

Using credit cards or cards can be a convenient way to make purchases and pay bills, but it's essential to understand the benefits and risks involved.

One benefit of using credit cards is that they often offer rewards and cashback programs, which can be a great way to earn extra money or accumulate points that can be redeemed for travel or other perks.

Credit cards can also provide a layer of protection against fraud and identity theft, as most issuers have zero-liability policies that protect consumers from unauthorized charges.

However, using credit cards can also lead to overspending and accumulating debt, as it's easy to lose track of transactions and balances.

Here's how credit card transactions work:

Authorization is the first step in the process, where the merchant submits the transaction to the acquirer, who verifies the card details and reserves the amount for the merchant.

This usually generates an approval code, which the merchant stores with the transaction.

The acquirer then sends the authorized transactions to the credit card association, which debits the issuer for payment and credits the acquirer.

The issuer pays the acquirer, and the acquirer then pays the merchant, minus any fees.

These fees can include the discount rate, mid-qualified rate, or non-qualified rate, which are tiers of fees the merchant pays the acquirer for processing the transactions.

A transaction can be submitted in a batch without prior authorization, such as when the cardholder is not present but owes the merchant additional money.

Authorization is the first step in the credit card transaction process, where the cardholder presents the card to the merchant, and the merchant submits the transaction to the acquirer.

The acquirer verifies the credit card number, transaction type, and amount with the issuer and reserves the amount from the cardholder's credit limit for the merchant. This generates an approval code that the merchant stores with the transaction.

Authorized transactions are then stored in batches, which are sent to the acquirer. Batching can be done manually or automatically, and it typically happens once per day at the end of the business day.

Some transactions may be submitted in the batch without prior authorization, such as those falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through.

Here are the key steps in the transaction process, outlined in a simple list:

A balance transfer credit card can be a great way to pay down debt, but it's essential to understand the terms. You can move a balance from another credit card and pay it down with a 0% APR promotion.

The promotional period can last anywhere from 12 to 21 months. This gives you a chance to pay down your debt without incurring interest charges.

However, you'll typically have to pay an upfront balance transfer fee of 3% to 5% of the transferred amount. This fee can add up quickly, so it's crucial to factor it into your plans.

Some balance transfer cards also offer a 0% APR promotion on new purchases. This can be a great way to save money on interest charges while you're paying down your debt.

Choosing a credit card can be overwhelming, but it doesn't have to be. To start, know your credit score and don't apply for cards that are out of your reach, as 19 percent of credit card applications were denied between March 2022 and February 2024.

Analyze your spending habits to determine what category most of your spending falls into, and find a card with high rewards for those purchases. For example, if you spend most of your budget on gas and groceries, look for a card that offers high rewards for those categories.

Understanding your goals is also crucial, whether it's building credit, earning rewards, or transferring a balance. Focus on one or two goals that your next credit card can help you achieve.

Choosing the right credit card can be overwhelming, but understanding the different types can make it easier. There are several types of credit cards to choose from, each with its own set of benefits.

Secured credit cards are great for building credit, especially for those with limited or bad credit history. They can be used to establish a positive credit history.

Student credit cards have lower application approval standards, making it easier for college students to build credit early and learn to use it responsibly. This is a great opportunity for students to start building their credit.

Store credit cards offer exclusive discounts and offers at a store you frequent. If you shop at a particular store regularly, a store credit card might be a good choice.

Balance transfer credit cards can help you save money by transferring balances from other credit cards to take advantage of low APR or zero APR offers. This can be a smart move if you have high-interest debt.

Travel rewards credit cards are perfect for frequent travelers, earning miles or points toward future travel through your spending. This can be a great way to earn rewards on your travel expenses.

Co-branded airline credit cards and hotel credit cards offer exclusive benefits with partnered airlines and hotels – like free upgrades, free checked luggage or early check-in. These benefits can make a big difference in your travel experience.

Cash back rewards credit cards earn a percentage of cash back on your spending to redeem for statement credits or a cash deposit to your checking account. This can be a great way to earn rewards on your everyday purchases.

Flexible rewards credit cards earn points on your purchases to redeem for travel, merchandise or cash. This gives you flexibility in how you use your rewards.

Here's a summary of the different types of credit cards:

Choosing a credit card can be overwhelming, but it doesn't have to be. To make the process easier, follow these steps to find a card that fits your needs and lifestyle.

First, know your credit score. You should only apply for cards for which you have a reasonable expectation of approval. According to Bankrate's 2024 Credit Denials Survey, 19 percent of credit card applications were denied between March 2022 and February 2024.

Determine your spending habits to find a card with high rewards for your typical purchases. If you spend most of your budget on gas and groceries, look for a card that offers rewards in those categories.

Your goals should also guide your choice. Are you using a credit card to build your credit, earn rewards, protect yourself from fraud, or transfer a balance? Focus on one or two goals that your next credit card can help you achieve.

Review welcome bonuses to see if they align with your goals. If you're deciding between multiple credit cards, it's a good idea to earn extra rewards or a statement credit from buying what you already planned to.

Don't forget to understand the card's fee structure, including interest rates and annual fees. A credit card may have excellent rewards, but if you know you're going to carry a balance, the interest rate could make it costly.

Use Bankrate's CardMatch tool to find the right credit card without spending hours on research. This free tool asks a few quick questions and delivers the best matches to you.

Credit card ownership brings additional risks with it, such as an increased risk of fraud.

A substantial fraction of consumers, about 40 percent, choose a sub-optimal credit card agreement, incurring hundreds of dollars of avoidable interest costs.

High interest rates can be a major issue, with some credit cards levying a rate of 20 to 30 percent after a payment is missed.

In some cases, universal default may apply, meaning a high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider.

This can lead to a snowball effect, where the consumer is drowned by unexpectedly high-interest rates.

Most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit.

Credit cards have strong consumer protections in place to safeguard you against fraudulent charges. The Fair Billing Credit Act limits your liability to just $50 if you report the charges within 60 days.

Many major credit cards offer even more protection, with $0 liability for a period of time. This means you won't be held responsible for any unauthorized charges.

However, debit cards have different rules. If you don't report a lost or stolen debit card quickly, you could be liable for up to $500. This is a risk you don't have with credit cards.

Credit card regulations can be complex, but understanding the benefits to merchants can help clarify the process.

Merchants experience reduced resistance when using credit cards, as customers are more likely to make a purchase without cash on hand. This is because credit cards eliminate the need for cash transactions.

The issuing bank assumes the credit risk, freeing merchants from the burden of evaluating each customer's credit history. This task is now performed by the banks, which assume the risk.

Merchants benefit from increased turnover, as customers are less inhibited by the amount of cash in their pockets and their immediate bank balance. This immediacy is a key aspect of merchants' marketing strategies.

Merchants can process transactions more securely than with cash, reducing theft opportunities and back office expenses associated with processing checks and cash. Credit cards also eliminate the need for transporting cash to the bank.

Merchants can expect to pay a commission of around 0.5 to 4 percent of the transaction amount, plus a fixed fee, for each credit card transaction. This commission is often referred to as the interchange rate.

Here's a breakdown of the fees merchants typically pay:

Merchants can also lose money on low-value transactions, especially if they have very low average transaction prices. In these cases, accepting credit cards can significantly reduce profit margins.

In the United States, credit card benefits can vary significantly between networks. MasterCard, for instance, offers a 60-day return extension with a limit of up to $250.

The benefits offered by Visa are more generous, with a 90-day return extension and the same $250 limit. American Express, on the other hand, provides a 90-day return extension, but with a higher limit of up to $300.

One area where Discover falls behind is in return extensions, which are not available on their credit cards. However, American Express provides a 1 additional year of warranty coverage, with a maximum of 6 years.

Visa's extended warranty benefit, however, is not clearly defined, and its coverage may vary depending on the issuer. MasterCard, on the other hand, offers a 2 times the original warranty period, with a maximum of 1 year.

Here's a comparison of the return extension benefits offered by different credit card networks in the U.S.:

In terms of loss or damage coverage, MasterCard offers a 90-day protection, while American Express provides a 90-day protection with a limit of up to $1,000.

Using credit cards can weaken self-regulation, leading to overspending. Several studies have shown that consumers are likely to spend more money when they pay by credit card.

This is because people don't experience the same level of pain when using credit cards as they do when paying with cash. Researchers have found that this lack of immediate financial consequence can lead to reckless spending.

In fact, using credit cards can even increase consumption of unhealthy food, compared to using cash. This is a concerning trend, especially for those trying to maintain a healthy diet.

Consumer Protections are in place to safeguard your financial well-being.

Both debit cards and credit cards are protected under federal fraud law, which limits your liability for unauthorized charges.

You won't be held responsible for more than $50 if you report fraudulent credit card charges within 60 days of them appearing on your statement.

Almost all major credit cards offer $0 liability protection for a certain period of time, giving you extra peace of mind when making purchases.

If you don't report a lost or stolen debit card right away, you could be liable for up to $500, which is a significant financial risk.

Many financial experts recommend using credit cards over debit cards, especially when making purchases online or in high-risk situations.

Merchants pay interchange fees to the card-issuing bank and the card association, typically ranging from 1 to 6 percent of each sale. These fees can vary depending on the merchant, card type, and other factors.

Interchange fees can be a significant expense for merchants, especially those with high credit card sales volumes. In some cases, merchants can negotiate lower rates with their banks.

For a typical credit card issuer, interchange fee revenues may represent about a quarter of total revenues. This highlights the importance of interchange fees in the credit card industry.

Merchants can add a surcharge to credit card transactions to cover the interchange fee, but this can encourage customers to use alternative payment methods. In some countries, merchants are barred from passing these fees directly to customers.

Here's a breakdown of the interchange fee variables that can affect the fee rate:

In 2008, credit card companies collected a total of $48 billion in interchange fees in the United States, with an average fee rate of about 2% per transaction.

Credit cards offer a range of benefits to cardholders, including convenience and no interest charges if the balance is paid in full within the grace period.

In the United States, most credit cards offer a 21, 23, or 25-day grace period on purchase transactions, giving cardholders plenty of time to pay off their balance without incurring interest.

Some credit cards also offer extended product warranties, price protection, and purchase protection, which can provide peace of mind and financial security for cardholders.

Many credit cards also offer loyalty programs that reward cardholders with cashback or points for their purchases, which can be redeemed for gift cards, products, or travel expenses like airline tickets.

Rewards are a great feature of credit cards, offering value in the form of cash back, points, or miles on everyday purchases. Some rewards credit cards also offer welcome bonuses and other perks.

Credit card issuers run cashback reward programs to encourage card use, typically awarding points or cash-points that can be redeemed for rewards like gift cards, statement credits, or exchanging them to Frequent Flyer programs.

Spending on the card can include or exclude balance transfers, payday loans, or cash advances, and points typically have no cash value until redeemed via the issuer. Rewards will generally cost the issuer between 0.25% and 2.0% of the spread.

Card holders typically receive between 0.5% and 3% of their net expenditure as an annual rebate, which is either credited to the credit card account or paid to the card holder separately. This means that for every dollar spent, you can earn between 5 cents and 30 cents back.

Some credit cards offer benefits like extended product warranties, reimbursement for decreases in price immediately after purchase, and reimbursement for theft or damage on recently purchased products. These benefits can provide peace of mind and protection for your purchases.

Rewards credit cards can also be issued in partnership with an airline or hotel brand, allowing you to earn rewards and benefits with the co-branded partner. This can be a great option for frequent travelers who want to earn rewards and benefits with their preferred airline or hotel.

Interest charges can be a significant factor in credit card usage. If you're not paying your balance in full each month, you'll likely be charged interest on the entire outstanding balance from the date of each purchase.

The general calculation formula for determining interest charges is (APR/100 x ADB)/365 x number of days revolved. This formula takes into account the annual percentage rate (APR), average daily balance (ADB), and the number of days the balance has revolved.

Even if you pay your balance in full the next month, you may still receive interest charges on your statement. This is because interest is charged from the original time of the transaction until the payment is made.

Credit card issuers often have multiple balance segments, each with a different interest rate. This can make it more complicated to manage your payments and avoid interest charges.

Payment allocation is generally at the discretion of the issuing bank, and payments will usually be allocated towards the lowest rate balances until paid in full.

Applying for a credit card can be a straightforward process if you know what to expect. You can apply online, by phone, or in person at a bank branch.

The credit card application process typically takes a few minutes to complete and requires basic personal and financial information. This includes your name, address, social security number, income, and employment history.

You'll also need to provide information about your credit history, such as your credit score and any outstanding debts. This information is used to determine whether you qualify for a credit card and what interest rate you'll be offered.

You can review the benefits of each credit card online and pick one most likely to approve someone with your credit score.

To find the perfect credit card, consider what features matter to you, such as no annual fee, balance transfer offers, cash rewards, or travel rewards.

Discover makes it possible to find out if you're pre-approved for a credit card before submitting an application, and checking won't hurt your credit.

You can review the benefits of each credit card online and pick one that suits your needs.

If your credit card application is denied, it's essential to review the adverse action notice you'll receive. This letter will detail the reasons for your denial, giving you a starting point to evaluate how to proceed.

You can check your credit reports to pinpoint areas you can address. You can register with Experian to get access to your Experian credit report for free anytime, and also get weekly reports for free from all three credit bureaus through AnnualCreditReport.com.

Determine your next steps once you have a grasp on your situation. If you have a low credit score, consider applying for a card that better matches your credit profile. Alternatively, you could take steps to improve your credit, increase your income, or take other steps to address the reasons for denial.