Credit cards are small plastic cards that can be used as a form of payment. The cardholder can present the card at various merchants who opt to accept them in order to buy goods or services. The issuer of the card allows the user to borrow money for a period of time. In return, the cardholder promises to repay the cost of these goods and abide by usage agreements.

A credit card is not the same as a charge card, as a charge card requires the entire balance to be paid in full every month. Credit cards allow users to maintain a balance if they cannot repay the whole amount monthly, and apply an interest charge.

Most credit cards are issued by banks or credit unions; however some retail outlets opt to provide credit cards to customers. There are a wide variety of credit card options, including cards that offer rewards (such as cash back, travel points, gift certificates, etc.), cards that offer low interest rates and cards that can be used for business purposes.

A credit card is issued after an applicant has been approved by the issuer, and a set line of credit has been established. The cardholder can then use the card as a form of payment anywhere the card is accepted.

Purchases are applied to cards in a few different ways. The first manner in which charges are applied to the account is through a point of sale system. This means that the cardholder took the card to a merchant, made a purchase, and used the card to pay. The card is usually swiped through an electronic device that allows the merchant to verify the validity of the account along with sufficient funds available in a few seconds by use of an electronic verification system. Data from the magnetic strip on the back or a chip in the card is obtained once it has been swiped and the purchase can be completed. The next way a purchase can be applied to the card is through a Card/Cardholder Not Present (CNP) transaction. This is quite common for ecommerce sales, mail order sales, and telephone sales where the merchant does not physically see the card. In these cases the account number is keyed in, along with the security code that is printed on the back of the card.

Once the purchase has been completed, the credit card user agrees to repay the issuer according to the terms of the account. This is further agreed to by signing the receipt at the time of the transaction that contains a record of the card details and the amount to be paid. At the end of the billing cycle, typically a one month period, the credit card holder is sent a statement that contains a full account of all transactions on the card. This will include purchases, fees, interest charges, and the total amount owed. After the card holder receives the statement, he or she can dispute any charges that are incorrect, or make a payment. The payment can be in full, or can be a lesser amount as long as it meets the minimum payment criteria. The payment must be received by the issuer by the due date or it is considered to be late.

If the payment is late, or if the card holder does not pay the entire balance, interest charges can be imposed. These charges are assessed on the entire outstanding balance from the date of each purchase. Late charge may also be applied to the account if it is paid late. These charges vary from card to card, but can be quite substantial. Other fees that can be imposed are over limit fees, when a user exceeds his or her line of credit, and account maintenance fees, which can be applied for too much use, too little use, or as basic membership fees.

Consumers tend to love credit cards because of the convenience factor. Compared to carrying cash, debit cards, and checks, credit cards allow short term loans to be made quickly and easily. Credit cards also offer a bit of consumer protection as they can provide a form of extended warranties on products, protect against fraud, and allow for recourse should a merchant not make good on a purchase. Couple these facts with benefit packages commonly offered, such as low introductory interest rates, cash back, free products, free travel options, and retail discounts, and customers find themselves using these little pieces of plastic like crazy.

Unfortunately, for all of the conveniences credit cards offer, they also have just as many detriments. Low introductory rates expire within six to twelve months, and after that a much higher rate can be charged. Customers are often not told exactly how high the interest rate can go, and end up paying as much as thirty percent interest in some cases. If a payment is missed, interest rates can also soar, and various fees can cause balances to add up quickly. Furthermore, when the card is issued, most agreements allow the issuer to raise interest rates for almost any reason they see fit. This can cause many problems to arise, such as making it difficult for a cardholder to make even the minimum payment, or having to miss payments entirely. When this happens, a snowball effect can begin to form, leading to a downward financial spiral that ruins a credit rating and drowns the individual in debt.

While credit cards can offer many benefits, they need to be used responsibly and with caution. Always research your options to find a card that will fit your needs, and make sure you fully understand all the terms of the user agreement prior to opening an account.