How do credit cards work?

Economy

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by Mya Kagan (whyzz writer) >> more about the author

Did you know that when people pay for things with credit cards, what they’re actually doing is borrowing money? – It’s true! Because borrowing money is a big responsibility, credit cards are only for use by responsible grown-ups.

Payments made with a credit card work basically like loans from the bank. If you pay the plumber with a credit card, the bank pays him the money you owe. You must then pay the bank back within a certain number of days. After that time passes, if you still can’t pay the full amount you owe, you will start to be charged fees (interest) that usually continue to increase until you’ve finished paying in full. (The fees are how the bank makes money from giving out these loans.)

Credit cards have both advantages and disadvantages. An advantage is that credit cards let you pay for things you need but can’t fully pay for all at once. For example, if you fall off your bike and need an x-ray, you may not be able to pay for this unexpected expense right away. A credit card can help you afford what you need and lets you pay it off as soon as possible. A disadvantage is that credit cards can get people into trouble when they buy too many things they can’t afford. If you use your credit card to splurge on lots of things you don’t need, paying it off can become a big burden. What was once $100 of fun purchases can become $200 in unpaid bills and mounting fees. The important thing for grown-ups with credit cards is that they only use them to buy things that can be paid off quickly, and to always pay on time and in full if possible!

Credit cards also have a few more advantages for responsible grown-ups who choose to use them:

Buying with a credit card and always paying on time helps grown-ups to earn “good credit.” Good credit shows lenders like banks that you are responsible with your money and debts. Good credit helps you when you need a loan for a big purchase like a house or a car.
Credit cards are also safer than cash in many ways. Cash can get stolen or be lost easily. Credit cards can be tracked. If a credit card is lost or stolen, calling the bank right away lets you cancel the card and any purchases made on it after the time it became misplaced.

Have you learned about the difference between wants and needs? A need is something essential that we must have to survive. A want is something that isn’t essential to survival, but which we would like to have if we can.

Grown-ups who use credit cards to pay for things they can’t fully afford have to consider whether the purchase is a want or a need. Learning the difference now can help you when you’re older!

Look at the following list and talk about whether the expenses are needs or wants!

- Candy and ice cream
- New music albums

- A winter coat
- A scooter
- Money to buy lunch at school

- Comic books

- A visit to the doctor
- New car tires to fix a flat

- A trip to the movies
- Popcorn at the movie theatre

- School supplies
- Groceries to cook healthy meals