Credit cards make it convenient in our everyday lives to purchase almost anything for sale: jewelry, computers, clothes, groceries, etc. They are accepted worldwide. Each time you take a "cash advancement" on your credit card or purchase an item with it, you're actually signing a contract between yourself and the credit card issuer for a loan, which consists of repayment of the principal loan plus interest on the unpaid balance. For example, if your credit card carries a credit limit of $2,500, you can purchase an item for $600 one week and purchase another item for $1,000 next week and so on, as long as you make the minimum payments called for on your creditor's statement. Credit cards also make it easy to make purchases that may be beyond a consumer's means.

There are several different types of credit cards available to consumers today. Let's review below the different types of credit cards and how they work:

MasterCard and Visa credit cards - These credit cards are unsecured and are considered a revolving open line of credit that doesn't have to be repaid in 30 days. These unsecured accounts allow you to carry a balance each month while borrowing additional money (credit) at the same time you're making minimum payments back to the credit card issuer on your revolving balance.

Department store credit cards - These credit cards are considered revolving charge unsecured accounts that allow you to purchase many items on credit (clothes, cosmetics, etc.) only from their store. These credit cards give you the complete flexibility to make monthly installment payments while adding new purchases to the account, as long as payments are made and you stay within your granted credit limit that the store has issued.

Oil company credit cards - These credit cards are not, in most cases, revolving charge accounts. They are unsecured and usually must be paid in full within 30 days. They are limited to that specific oil company's gas station for purchasing gasoline and, in some cases, tires, repair work, batteries, car washes and other items offered by that gas station.

Travel & Entertainment cards - These credit cards are not, in most cases, revolving charge accounts. Traditionally, they do not allow you to carry a balance each month. They require payment in full within 30 days. Examples of these cards are: American Express, Diner's Club and Carte Blanche. Travel & entertainment credit cards are unsecured and offer a grace period with no interest.

ATM credit cards - These cards are called automated teller machine (ATM) cards. These cards are issued by your bank. These cards allow you to obtain cash (increments of $20.00) from almost any bank 24 hours a day, 7 days a week. ATM cards work just like cash. Each time you use your ATM card you're really using your own cash that is in your checking or savings account. As you purchase an item with your ATM card, the bank, in return, will draft the money out of your bank account and pay the merchant from whom you purchased the item. These ATM cards, however, will not help the consumer build credit.

Secured credit cards - These secured credit cards are the complete opposite of an unsecured credit card. Secured credit cards are secured accounts that require you to deposit an amount of money (typically $300, $500 or $1,000) into a savings or CD account at the bank that is issuing the secured credit card to you. In reality, you're putting your own money into an account as collateral against anything you purchase on that card. If you don't make the agreed payments each month, that credit card issuer has the right to draft your payments against your deposit (in savings). Once you have deposited money into a savings account as collateral, you cannot withdraw the principal or interest accumulated on your principal without canceling your secured credit card.

In order to qualify for a credit card you must be at least 18 years old and have a steady source of income. Credit card companies will run your credit report and your credit report will show other debts on which you are making payments such as, car loans, student loans, other credit cards, etc. These payment histories, if current, will show how responsible you've been in paying your bills while helping the credit card company decide how much credit (limit) to extend to you on a credit card.

There are six costs associated with using credit cards. Let's review below the different costs and how they work.

1. Interest - This is added to your credit card. Interest is usually around 18.9 percent and may be compounded on a daily basis against the balance that you carry on your credit card. Interest is how credit card issuers make money. Interest is also what makes up the finance charge.
2. Annual fees - Some credit card issuers charge these fees (up $75 or higher) to your credit card each year. Annual fees are also sometimes called membership fees. Credit cards that don't charge an annual fee will usually charge a higher interest rate. They charge high interest to consumers in order to cover losses due to non-payments, collections or bankruptcy. Each time a consumer doesn't pay, all cardholders suffer by increased interest rates.
3. Cash advancement fees - These fees are quite simple. As you borrow cash against your credit card, the credit card issuer will charge you a fee. Cash advancements will accumulate interest just like a revolving balance on a bank credit card. The only difference is that credit card issuers don't waive interest if the balance is paid in full within 30 days.
4. Transaction fees - These fees are sometimes charged to your credit card account if you change your payment due date, use your credit card, ask to lower your interest rate, transfer money, etc. Each credit card issuer has their own guidelines. These fees are rare and are not standard with national banks.
5. Late fees - Late fees are charged to your credit card account if your payment has not been received by the credit card issuer's due date which is stated on the credit card statement. The fee can range from $29 to $35. These fees are very common and can add up quickly. Sometimes they can actually increase your overall balance.
6. Over-limit fees - Credit card issuers have the right to charge you a fee if you charge in excess of your credit limit. This fee can range from $29 to $35 depending on the credit card issuer. If you go over your credit limit, most credit card issuers may request that you pay the amount you're over the limit in addition to the minimum monthly payment called for on your credit card statement.

A credit card statement can be difficult to understand because each credit card company has different requirements and a different looking statement. Here is the basic information that all credit card companies share and include on their monthly credit card billing statements. Let's review:

1. New Purchases & Charges - This is where the credit card company will outline what you purchased (like clothes) or had charged (like Internet service) to your credit card during the month or billing cycle. Note: You should always check what items were charged to your account. This way you can make sure that you were not double charged for the same item.
2. Previous Balance - This is the amount you owed on your credit card statement before you made a payment to the card. Note: You should always check your current statement each month to make sure that your previous balance matches with your last month's bill. Your current balance should be less than your previous balance, unless you have made new purchases or charges during the month.
3. Payments and credits - This is where the credit card company will outline what you paid or what items where returned for credit. You should always look at your statement to make sure that your monthly payment was received and applied correctly against your outstanding balance due. Also you should make sure that you were credited for returning any items.
4. Cash advances - This is where the credit card company will outline what you borrowed against the credit card limit. Note: Most cards allow you to obtain cash from bank ATM's using a PIN number supplied by the credit card company. These cash advances will usually have a higher interest rate than regular purchases.
5. APR - This stands for Annual Percentage Rate. The APR is the rate used when calculating the finance charge amount outlined on the statement.
6. Finance charges - If you carry a balance on your credit card statement the credit card company will apply finance charges to your outstanding balance. Finance charges are how a credit card company makes profit when they issue you credit to purchase items.
7. Grace period - This is the time you have before the credit card company charges you interest on the outstanding balance. Note: Not all credit card companies have grace periods. It's important to know if your card has a grace period on purchases or cash advances and the timeframe for the grace period.
8. Minimum payment - This is the amount that the credit card company requires that you pay toward the outstanding balance. Note: Minimum payments usually range from 2 percent to 4 percent of the outstanding balance. If you owe $2,500 your minimum payment could range from $50 to $100.
9. Due date - This is considered the date that the credit card company must receive your payment at their office and record it in their computer. Note: Most credit card companies have a billing cycle of 29 to 31 days and give you a due date that is 20 to 30 days from when your credit card bill was printed.
10. Credit limit - This is where the credit card company outlines the maximum amount of credit that you have to spend on the card.
11. Late fee - This is where the credit card company outlines the fee for paying your minimum payment late. Note: Most credit card companies will apply a late fee ($29 to $35) to your statement if your payment is not received by the required due date on the statement.
12. Over-limit fee - This is where the credit card company outlines the fee for spending over your credit limit. Note: Most credit card companies will apply an over-limit fee ($29 to $35) to your statement if you charge beyond your credit limit. If this happens, in most cases, your charging privileges will be suspended until you pay down your balance.
13. Other fees - Sometimes your statement will reflect other fees on things that you purchased from the credit card company, like credit insurance.

We believe that you should have no more than 4 credit cards. For example:

• Bank Credit Card (Visa or MasterCard)
• Gas and Oil Company Credit Card
• Department Store Credit Card
• ATM Bank Debit Card

Having more than 4 credit cards could, in some cases, negatively affect your credit rating with other companies to whom you are applying for credit. Some companies may view you as someone who needs credit. This could send a message that you have no available cash and that you could be having or beginning to have financial problems. Having too many credit cards makes it easy for you to charge on all of them, and before you know it, you're in over your head! Having too much debt can affect your credit rating (Debt-to-Income Ratio) when purchasing large items like a house or a car.

If you make the minimum monthly payment called for on your credit card statements it could take you years and thousands of dollars in finance changes to pay that card off. The minimum payment is calculated as a percentage of your current balance. The minimum payment drops each month as your balance is paid down, therefore keeping you in debt for a long time. The scenarios below will show you the "true cost" of making minimum payments versus paying a fixed payment each month. To illustrate our point, let's say you owe $3,000 on a MasterCard with a minimum payment of $60 dollars and an interest rate of 18%. Let's review the different repayment scenarios:

• Scenario 1 - If you paid the minimum monthly payment of $60 initially with an interest rate of 18% it will take you about 451 months (about 37 years) to pay off the $3,000 balance. Furthermore, you will have paid about $7,930.60 in interest charges.
• Scenario 2 - If you paid a fixed payment of $100 dollars with the same interest rate of 18% it will take you about 41 months (about 3.5 years) to pay off the $3,000 balance. Furthermore, you will have paid about $1,015.49 in interest charges.

THE SOLUTION: Scenario 2 is the best solution. By adding $40 dollars and fixing your monthly payment at $100 dollars each month you could pay off that $3,000 balance in about 410 months (about 34 years) sooner and save about $6,915.11 in interest charges. (Source: Bankrate.com)

As you can see, making the minimum payment (outlined in Scenario 1) is not the best way to get out of debt. If possible, you should always pay a fixed amount each month per credit card until paid in full. Once paid off, shift that fixed payment to the next card with the highest interest rate. Continue this process until you have paid all your accounts in full. This is the quickest way to eliminate your credit card debt.

The biggest expense component that you have if you carry a balance on your credit card each month is the interest charge. Most people don't realize how much they pay in interest on an unpaid balance. An unpaid balance not only creates interest charges, it increases your debt load (Debt-to-Income ratio) which could affect your credit rating and your ability to obtain credit. The scenarios below will show you the "value" of paying the balance in full each month versus carrying a balance a making the minimum payment called for each month. To illustrate our point, let's say that you charged $300 on a MasterCard each month for 12 months. Let's review:

• Scenario 1 - If you charged $300 each month and paid it in full each month by the statement due date at the end of 12 months your accumulated interest and balance would be zero ($0).
• Scenario 2 - If you charged $300 each month, made the minimum payment each month (3% of unpaid balance) with an interest rate of 18%. At the end of 12 months your total accumulated interest would be $332.76 with a remaining unpaid balance of $3,266.76.

Under scenario 2 if you stopped charging $300 each month starting in the 13th month and continued to only make the minimum payment each month (3% of unpaid balance) with an interest rate of 18%, it would take you 198 months (16.5 years) to pay off your debt. In that time, you will have paid out a total of $9,599.14. Of the $9,599.14 paid, $3,065.76 is interest.

Your goal should be to never carry a balance on credit cards. Only charge an amount that you can comfortably pay off completely when the bill arrives. (Source: Bankrate.com)

Federal law provides protection to consumers on their use of credit cards. Here are some of the following protections when a consumer uses a credit card.

1. Errors on your bill - If you find a mistake on your bill, you have the right to dispute the charge. Whatever the reason might be you still must pay the amount of the bill that's not in dispute, including finance and other charges.
2. Unauthorized Charges - If someone uses your credit card without your permission, you can be held responsible for up to $50 per card. If you report your credit card lost before it is used, the credit card company cannot hold you liable for any unauthorized charges.
3. Prompt Credit for Payment - The credit card company must credit your account balance the day they receive your payment. Mailing to the wrong payment address could delay crediting of your account and could result in a late payment charge.
4. Refunds of Credit Balances - When you make a return or pay more than the total balance, you can keep the credit on your account or request a refund in writing. For a refund, the amount must be more than a dollar. If a credit stays on your account for more than six months, the credit card company will send you a refund.
5. Disputes about Merchandise or Services - As a cardholder you have the right to dispute any charges for unsatisfactory goods or services.

Credit card blocking works like this. If you use your credit card to check into a hotel or rent a car, that company will contact your card issuer and give them an estimated total of the amount needed. If your card issuer approves it, your available credit on your card is reduced by a specific amount. That's a "block." For example: If you check into a hotel that cost $80 per night and you plan to stay 7 days, the hotel will "block" around $700 on your credit card, which includes hotel cost and other anticipated charges (25% of hotel cost) like food and/or beverages.