Wednesday, May 5, 2010

Credit Cards – Convenience or Loans?

How credit cards originated

Credit cards were conceptualized for convenience and not for loans. They became existent when a New York businessman Frank McNamara, during the fall of 1949 went out at to a restaurant to entertain a client. But when he was about to pay the bill, he realized he left his wallet in another suit. Luckily, his wife was able to save him from potential embarrassment. That incident made him think of a cash substitute that can make someone freely spend in the absence of cash.

A few weeks later, he discussed with his lawyer to form a club of diners who would be able to sign for their meals at certain restaurants and then settle the bill at a later date. That started the Diners Club, the early form of credit cards and dining loans. Though the Diners Club was applicable for restaurants only, from it came universal credit cards. It is now a system of payment using a small plastic card issued to users of the system, entitling the holder to purchase goods and services. The issuer of the card pre-established the cardholder’s credit line.

Benefits of credit cards

The major benefit of credit cards is for the cardholder’s convenience. He can go out and buy goods without cash and thereby avoid the danger of losing cash or having his cash being stolen. Credit cards, if stolen, are useless to another person and so cannot be used by anyone other than its owner. The banks, as issuer of the credit cards have more fraud protection. Even if they are loans, in some places, cardholders gain more prestige in the cash register queues than customers.

Compound interest working against you

Later on, credit cards when used without much planning can become someone’s nightmare. Since the credit is only short-term, interest applies to credit bills and in addition, penalties and charges for unpaid balance. Many have their dilemma begin when they use credit cards without much planning. The payable amount can skyrocket to huge figures card holders have no capability to pay.

Since then, education on how to properly use credit cards circulated among the society members, scaring the others who never had the chance to have credit cards, and never had the experience to use them, develop fear in acquiring these forms of loans. Its compounding interest is the very factor that transforms convenience to nightmare.

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