How do credit cards work?

In this day and age, where there are so many concerns about debt in general, on a national as well as a global scale, more people are starting to find themselves at crossroads about their own personal finances. Credit card debt is a very large part of the everyday life in this culture, something that lives in the background until there are crises, minor or major. Times like this, people often start to ask the basic questions about economic structure, and one immediate question is: how do credit cards work?

The first credit card was offered by West coast banks in the 1920s. The idea here was that some people were considered good credit risks, and could apply for loans at banks. As a courtesy, this extended into offering a card where they could use that for very small amounts, with the promise of reimbursing the bank later. There was a small interest charge applied, and that’s the origin of the credit card system today. By the 1950s, there were more credit cards being offered, notably by the Diner’s Club and American Express. Visa and Master Charge, later to become Master Card, followed suit, and eventually the Discover card.

The reason that credit cards work so well for the banks, is that they can offer people the chance to buy things they wouldn’t normally be able to afford, with the legal obligation to repay with interest. Usually the interest is quite high, and this it the APR to which customers need to pay attention. A low APR can be a good thing, but they usually only last for a year, before it goes up, and often to 19-23% interest. As long as there is a balance on the card, the customer is paying interest on that amount.

The culture has become accustomed to carrying large amounts on their credit cards, so much so that it’s become an everyday occurrence. It doesn’t seem out of the ordinary at all to have thousands of dollars owed to several different credit card companies at once. People are paying interest on money already spent, and often this can take years to pay off completely, at which point there will often be more credit cards in their possession, starting the cycle all over again. They can be very convenient for people who use them in emergencies, but they are also a great generator of income for the banks lending the money.