Credit card facts for kids

A credit card is a special payment card, usually given out by a bank. It lets you buy things or get cash even if you don't have enough money in your bank account right away. Instead, you borrow money from the bank, which you promise to pay back later. This is called using "credit." Credit cards are a very common way to pay for things all over the world.

A credit card is different from a debit card. A debit card uses money directly from your bank account. A credit card is also different from a "charge card," which makes you pay back everything you borrowed each month. With a credit card, you can sometimes pay back a smaller amount each month, but then you'll be charged extra money called "interest" on the money you still owe.

As of June 2018, there were over 7.7 billion credit cards used globally. In 2020, over a billion credit cards were in use in the United States alone. About 72.5% of adults in the U.S. had at least one credit card.

Credit cards from the South African Absa Bank

Understanding Credit Cards

What is a Credit Card?

A credit card is like a small, short-term loan that you can use again and again. When you use it, the bank pays the store for you. Then, you owe that money to the bank. You get a bill each month showing what you've spent. You can either pay the full amount or a smaller "minimum payment." If you don't pay the full amount, the bank charges you extra money called interest.

How Credit Cards are Different

• Debit Cards: These cards take money directly from your bank account. If you don't have enough money, the payment won't go through.
• Charge Cards: With these, you must pay back everything you spent by the end of each month. There's usually no option to carry a balance and pay interest.
• Credit Cards: These let you borrow money and pay it back over time. You can carry a balance, but you'll pay interest on the amount you still owe.

The Story of Credit Cards

Early Ways to Pay Later

Long ago, people used simple "charge accounts" at stores or hotels. They would buy things and promise to pay later. To keep track, they used special metal coins or plates with their account number. One early example was the Charga-Plate, used in the U.S. from the 1930s to the 1950s. It was a metal rectangle with the customer's name and address. Stores would press it onto a paper slip to record a purchase.

First Travel Cards

In 1934, airlines created the Air Travel Card. This was one of the first cards that could be used at many different places (airlines, in this case). It let passengers "buy now, pay later" for tickets. By the 1940s, it was used by many U.S. airlines and became the first internationally accepted charge card in 1948.

Cards for Everyone

In 1950, the Diners Club created the first "general purpose" charge card. This meant you could use one card at many different restaurants. Later, companies like American Express made these cards popular worldwide.

Modern Credit Cards Appear

In 1958, Bank of America launched the BankAmericard in California. This was the first card that worked like modern credit cards, allowing people to pay back over time. It was a big success because it was accepted by many stores and used by many customers. This card eventually became Visa. A few years later, a group of banks created Master Charge to compete, which later became MasterCard.

At first, banks sent credit cards to many people without them asking. This caused some problems, so new rules were made in the 1970s to ensure cards were given out more carefully.

Technology helped a lot! In 1973, systems became computerized, making transactions much faster. Instead of checking lists of stolen cards, stores could quickly verify cards electronically.

Credit Cards Around the World

After the U.S., the United Kingdom's Barclaycard launched the first credit card outside America in 1966. Credit cards became very popular in places like Canada, Australia, and New Zealand. Other countries, like Germany and France, used different payment methods at first. Over time, credit card use grew globally, especially with the introduction of secure "chip cards."

Metal signs at a plant nursery in Los Angeles County, California, marketing Master Charge and BankAmericard

Getting Cash with Your Card

Cash Advance Explained

A cash advance is when you use your credit card to get actual cash from an ATM or a bank. It's like taking a small loan directly from your credit card.

There are usually extra fees for cash advances, often 3% to 5% of the amount you take out. Also, the interest on cash advances usually starts right away, and it can be higher than the interest on regular purchases. This means it's often more expensive than just buying something with your card.

How Credit Cards Work Day-to-Day

Making a Purchase

When you use your credit card at a store, the merchant (store owner) sends the details of your purchase to their bank. This bank then checks with your credit card's bank to make sure your card is valid and you have enough credit. If everything is okay, the purchase is approved in seconds!

You usually confirm your purchase by signing a receipt or entering a personal identification number (PIN). For online shopping or phone orders, you might give extra details like a security code from the back of your card.

Your Monthly Statement

Each month, your credit card bank sends you a statement. This statement lists all your purchases, any fees, the total amount you owe, and the smallest amount you must pay (the "minimum payment"). You can often view these statements online.

If you think there's a mistake on your bill, you can tell your bank, and they will investigate. Laws in some countries, like the U.S., protect you from having to pay for unauthorized charges if your card is stolen.

Credit Limit

Your credit limit is the maximum amount of money you can borrow on your credit card. Banks decide this limit based on things like your credit score (a number that shows how good you are at paying bills) and your income. If you use your card responsibly and pay on time, your bank might increase your limit over time.

Minimum Payment

You must pay at least the "minimum payment" by a certain date each month. If you don't, you might get a late fee. If you only pay the minimum, you'll be charged interest on the remaining balance. It's usually best to pay the full amount if you can, to avoid paying extra interest.

Interest Charges

If you pay your entire credit card bill on time each month, you usually won't pay any interest. This is called a "grace period." However, if you don't pay the full amount, interest will be added to the money you still owe. This interest is usually a percentage of your unpaid balance and can add up quickly.

Who is Involved?

Many different groups work together to make credit cards function:

• Cardholder: That's you, the person using the card.
• Card-issuing bank: The bank that gave you the credit card. They send you the bill.
• Merchant: The store or business where you use your card.
• Acquiring bank: The bank that helps the merchant accept credit card payments.
• Card association: Big companies like Visa or MasterCard that create the rules for how cards are used and processed.

Visa, MasterCard, and American Express are card-issuing entities that set transaction terms for merchants, card-issuing banks, and acquiring banks.

How a Card Transaction Happens

When you swipe or tap your card, a few things happen very quickly: 1. Authorization: Your card details and purchase amount are sent to your bank. Your bank checks if you have enough credit and approves the purchase. 2. Batching: All the day's approved transactions from a store are grouped together. 3. Clearing and Settlement: The card association (like Visa) tells your bank to pay the store's bank for your purchase. 4. Funding: The store's bank then pays the store, minus a small fee for processing the transaction. 5. Chargebacks: If there's a problem with a purchase (like a faulty item), you can dispute it. This is called a chargeback, and your bank will investigate.

Different Kinds of Credit Cards

Business Credit Cards

These cards are for businesses, not individuals. They help companies manage their spending and often offer special rewards for business-related purchases like office supplies or travel.

Secured Credit Cards

If you're new to credit or want to improve your credit history, a secured credit card can help. You put down a deposit (like $500), and that becomes your credit limit. You still make regular payments, but the deposit acts as security for the bank. Paying on time helps you build a good credit score.

Prepaid Cards

Sometimes called "prepaid credit cards," these are actually more like debit cards. You load money onto them beforehand, and you can only spend the amount you've loaded. No credit is offered. They are useful for online shopping or for teenagers to learn financial management without going into debt. However, they often have fees for buying and using them.

Digital Cards

A digital card is a virtual version of a credit card that lives on your phone or computer. You can use it for online payments or with mobile payment apps.

Good Things and Not-So-Good Things About Credit Cards

Benefits for Cardholders

• Convenience: Credit cards are easy to use for shopping, especially online or when traveling.
• Short-term loans: You can buy things now and pay later, which is helpful in emergencies.
• No interest: If you pay your full bill on time, you don't pay any extra interest.
• Protection: Many cards offer protection against fraud, extended warranties on purchases, or travel insurance.
• Rewards: Some cards give you points, cash back, or travel miles for your spending.

Comparing Credit Card Benefits in the U.S.

Here are some common benefits offered by credit cards in the United States:

Drawbacks for Cardholders

• High interest: If you don't pay your bill in full, the interest charges can be very high, making your purchases much more expensive.
• Risk of debt: It's easy to spend more than you can afford, leading to debt that can be hard to pay off.
• Fraud risk: While banks offer protection, there's always a risk of your card information being stolen and used by others.
• Overspending: Studies show people tend to spend more when using a credit card compared to cash.

Impact on Everyone

• Higher prices: Stores pay fees to accept credit cards. Sometimes, they might raise prices slightly for all customers to cover these costs.

Benefits for Stores

• More sales: Customers are more likely to buy things if they don't need cash right away.
• Security: Credit card payments are often safer than handling a lot of cash or checks.
• Less work: Banks handle the credit checks and payment processing, saving stores time and effort.

An example of street markets accepting credit cards. Most simply display the acceptance marks (stylized logos, shown in the upper-left corner of the sign) of all the cards they accept.

Costs for Stores

• Fees: Stores pay a percentage of each credit card sale as a fee to the banks.
• Equipment: They might need to buy or lease special machines to process card payments.
• Security: Stores must follow rules to keep your card information safe.

How Credit Cards are Made

Technical Details

Most credit cards are made of plastic and are about the size of a driver's license. They have a unique bank card number on them. This number helps identify the bank and your specific account.

Modern cards often have a computer chip embedded in them for extra security. They also have a magnetic stripe on the back. You'll find an expiration date and a security code (CVV) on the card, too.

An example of the front in a typical credit card:

1. Issuing bank logo
2. EMV chip (only on "smart cards")
3. Hologram
4. Card number
5. Card network logo
6. Expiration date
7. Card holder name
8. EMV Contactless indicator

An example of the reverse side of a typical credit card:

1. Magnetic stripe
2. Signature strip
3. Card security code

Keeping Your Card Safe

Protecting Your Information

Credit card security depends on keeping your physical card safe and your card number private. If someone gets your card or its number, they could use it without your permission.

• Signatures and PINs: For in-store purchases, you often sign a receipt or enter a PIN to prove you're the cardholder.
• Online Security: When shopping online, websites use special encryption to protect your card details. You might also be asked for the security code from the back of your card.
• Virtual Cards: Some banks offer "virtual credit cards" with one-time use numbers for online shopping. If this number is stolen, it can't be used again.
• Physical Security: Many cards have special features like holograms or watermarks that are hard to copy, helping to prevent counterfeiting.

What to Do if You're Suspicious

If a store owner is suspicious about a credit card, they can make a "Code 10" call to the bank. The bank operator will ask questions to help the merchant decide if the card is legitimate.

Costs and Money for Banks

Bank Costs

Banks have costs for running credit card programs:

• Unpaid debts: Sometimes people can't pay back what they borrowed. This is a loss for the bank.
• Fraud: Banks lose money when fraud happens, even though they work hard to prevent it.
• Interest expenses: Banks borrow money themselves to lend to cardholders.
• Operating costs: This includes everything from printing cards to customer service and computer systems.
• Rewards programs: The points or cash back you earn are a cost for the bank.

Bank Revenues

Banks make money from credit cards in a few ways:

• Interchange fees: These are fees that stores pay to banks for processing credit card transactions.
• Interest: Banks earn interest on the money that cardholders don't pay back in full each month.

Fees You Might Pay

Credit card companies can charge various fees:

• Membership fees: Some cards have an annual or monthly fee.
• Cash advance fees: Extra fees for getting cash from your card.
• Over-limit fees: If you spend more than your credit limit, you might be charged a fee.
• Late payment fees: If you don't make your minimum payment on time.
• Foreign currency fees: Fees for using your card in another country.

In the U.S., a law called the Credit CARD Act of 2009 helps protect consumers by requiring banks to tell you 45 days before they change certain fees.

Over-Limit Charges in Different Places

• United Kingdom: Rules were put in place to make sure that fees for going over your credit limit were fair.
• United States: You usually have to agree (opt-in) to be charged over-limit fees. If you don't opt-in, your transaction might just be declined if it goes over your limit.
• France: The banking system is different. Most cards are debit cards that take money directly from your account. There isn't a system for building credit history like in the U.S.
• Vietnam: Banks set credit limits based on your income and credit history. There are penalties for going over your limit.
• European Union: There are limits on the fees banks can charge each other for credit card transactions. Also, you shouldn't pay extra fees for using your credit card in another EU country compared to your home country.

Helpful Resources for Consumers

Canada's Credit Card Database

The Canadian government has a website that lets you compare nearly 200 different credit cards. It shows you their fees, interest rates, and reward programs. This helps people choose the best card for their needs.

Credit Cards at ATMs

You can often use your credit card at an ATM to get cash. However, remember that cash advances usually come with extra fees and higher interest that starts immediately. This means it's usually more expensive than using your card for purchases.

Acceptance mark at an automated teller machine

Acceptance Mark

An acceptance mark is a logo (like Visa or MasterCard) that you see on a store window or ATM. It tells you which types of credit cards that place accepts.

Credit Cards for Starting a Business

Some famous entrepreneurs, like the founders of Cisco Systems and Google, used personal credit cards to help start their businesses. They borrowed money to buy computers and equipment when they couldn't get other loans.

However, this is very risky! Most new businesses don't succeed. If a business fails, the person who used their credit cards is still personally responsible for paying back all that debt. It's a big risk to take.

Cashback Reward Programs

Cashback reward programs are special offers from credit card companies to encourage you to use your card. When you spend money, you earn points or a percentage of your spending back as cash. You can then use these rewards for gift cards, statement credits, or travel.

These programs are a cost for the banks, but they encourage more people to use credit cards. If you pay your bill in full every month, these rewards can be a nice bonus. But if you carry a balance and pay high interest, the interest costs will likely be much more than any rewards you earn.

See also

In Spanish: Tarjeta de crédito para niños