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Pluses and Minuses of Credit Cards: How to Use Them Without Getting Into Debt

Updated on January 10, 2014

What a Credit Card Looks Like on Both Sides

Picture 1 on top is how your credit card looks like on the front. Picture 2 at the bottom is the backside of your credit card with your signature and CVV number.
Picture 1 on top is how your credit card looks like on the front. Picture 2 at the bottom is the backside of your credit card with your signature and CVV number.

Explaining the Information on a Credit Card

The front side explained in detail
The front side explained in detail

What exactly is a credit card and why do companies want you to have one?

A credit card is simply a card that authorizes you to borrow money from the credit card company or from your bank. You can buy anything from a screwdriver to a ticket to Rome as long as you pay back what you 'borrowed'.

Companies normally allow what is called a 'Grace Period' to repay your outstanding amount. Let's say you used your credit card for those new headlights you've been eying greedily for the last 6 months. You have 30 days to repay $2500 at no interest (no extra money on top of the $2500).

On the other hand, if you exceed the 30 day time-period, the company will begin to charge you interest on top of the basic amount.The grace period varies across credit card companies but

Sadly, what many people don't realize is that this seemingly 'nominal' charge isn't nominal at all but will add up to a pretty frightening figure if you don't pay up for say 4 months. But more on that later.

For starters, let's take a closer look at what's printed on your credit card

Decoding the Numbers on a Credit Card

Credit cards resemble each other in their dimensions and material. The reason behind this uniformity is an international regulatory organization called the ISO (International Standards Organization).

They are responsible for monitoring standards on a global level and it's just as well. Credit cards are used all over the world and most credit card companies will allow you to purchase goods or services from anywhere from New Jersey to New Delhi. So a standardized format helps.

There is a lot of 'hidden' information packed away in the numbers that you see on your credit card. The first six digits on your credit card is issuer identifier numbers. these numbers tell exactly who your card issuer is.

For example, if your credit card is issued by American Express, it's likely to begin with 34XXXX or 37XXXX while a MasterCard would begin with 4XXXX.

The second set of 6 digits identifies the issuer while the remaining digits represent your account while the last digit is technically called a 'check number'. The check number is arrived at by a series of complicated algorithm called 'Luhn Algorithm' which thankfully is all done by the issuer and not by us ordinary folks.

The check number helps minimize credit card because it discourages attempts to create fraudulent credit card numbers. A credit card can carry a maximum of 19 digits printed on it. In addition to the number, the card also carries an issuing date and a date of expiry.

The validity period of credit cards can vary from as little as three years to 20 years. But you might want to be clear on how to interpret the expiration date:

Say the expiration date is printed as 07/2015. This means that your credit card will not be deemed valid after 11:59 pm on July 31st, 2015. To be precise, as of August 1st, 2015, your credit card will no longer be valid.

Always keep an eye on the expiration date. Most of us tend to forget important things like that in the shuffle of our daily lives. Note it down in your diary so you can go ahead and apply for a renewal on your credit card.

Applying for Renewal of your Credit Card

The renewal process is usually a routine procedure where you'll have to fill out a form (either on paper or online) and submit it for approval. Sometimes approval is instantaneous while at other times, you may a waiting period.

The waiting period vari significantly depending on the bank as well as your credit rating. The better your credit rating, the faster will be the approval.

Significance of the Security Code at the Back of the Card

There is a 3-digit security code number at the back of your card. The code is also referred to as the Card Verification Value (CVV) or Card Code Verification (CCV). Although the number might be longer, it's the last 3 digits that count as the security code.

To spot the CVV, simply look for it on the right of the signature box. CCV codes are particularly useful for online transactions. Since credit card fraud is on the rise, the security code is a precaution that verifies your identity before the transaction is concluded.

How to Use Your Credit Card Without Paying Huge Interest Rates

The primary use of credit cards is to facilitate ease of payment and avoid the inconvenience of carrying cash. Credit cards are not to be used as a means to buy what you cannot afford. Take the old-fashioned view and only spend what you can repay.

Credit companies absolutely love big credit card users and why not? Look at the way they calculate interest:

Interest rates on credit cards vary roughly between 13% to 15%. Assume an average interest rate of 14%. Suppose you spent say, $3000 in December in lieu of Christmas shopping.

Now if you pay back the entire amount of $2500 within one month, you don't have to pay any interest (Frankly, that's the right way to go about it). Just pay up.

On the other hand, if 10 days are up and you pay, say, $500. Your remaining amount is $2000 and it is on this amount that you'll be charged interest on a daily rate.

(10 days x 500) + (20 days x 2000) = 45,000

45,000/30 = 1500

To calculate the interest on $2000 at a rate of 14%; first divide 0.14 by 365. This is 0.00038.

So now you do this to calculate what's called daily interest rate:

1500 x 0.00038 = 0.57

0.57 x 30 = 17.1

Your interest charge for every month is $17.1. Credit companies use what's referred to as 'compound interest' to calculate rates. So if you don't pay back what you owe, the interest rate for each month keeps on adding up.

Tips on How to Use Credit Cards Sensibly

- Avoid going haywire with your credit card. You might begin to feel more money than you actually do.

- Pay as much as you can towards your debt repayment. Paying the minimum monthly will only end up costing you more. The best option is to clear off what you owe and save money on the interest.

- Before signing on for a credit card, make sure you understand the terms and conditions fully. If necessary, meet up with a customer service professional and get your doubts cleared.

- As far as possible, avoid paying for your daily purchases like milk and bread using a credit card.

- As a rule of thumb, stay within 30% of your credit limit. Avoid burning up your credit card to the brim. Keeping your debt low also helps you build a better credit rating.

- If you have multiple credit cards, consider using each for nominal expenses each month and pay back the sum. If you don't use the cards at all, creditors might close down the inactive account.

What you need to remember here is that whether you close down your credit card account or your creditor does, it can damage your credit rating.

- Lastly, keep a close watch on your credit card statements. If you use more than one card, sit down with a pen and paper and figure out what you owe.

If you enjoy a decent credit rating and have been a prompt client as far as your repayments go, try and negotiate a more competitive rate by talking to your credit card company. There is a lot of stiff competition among credit card companies and as a customer, you can take full advantage of this to bargain for lower interest rates.


A credit card is intended for convenience and is not to confused with getting an instant loan to buy something that you cannot really afford.

Consumer credit is a multimillion dollar business. Credit card companies and banks are becoming more aggressive as they fight for market share. But at the end of the day, it's you has to micromanage your plastic card so that you derive maximum benefit and minimize losses in the form of exorbitant interest rates.


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