Many people with great credit, who can borrow like no tomorrow, and get all the advantages of favorable credit terms have no idea how credit cards really work. This is not unexpected, considering that the banks and financial institutions that issue credit cards deliberately mislead borrowers about what it is they do.

To clear up some of the more confusing aspects of how credit cards work, it makes sense to cover the 3 biggest myths about how they function. You will not find this information anywhere or at the very least it will be very difficult. So, don’t be surprised when you learn why these myths are just that, and not facts.

Myth 1: Credit Cards Lend To You.

Many believe that a credit card is like a magical plastic card that allows you to get whatever your heart desires with just one easy swipe. You take that Mastercard, or Visa, or American Express, or Discover and you get cars, clothes, exotic trips, luxury furniture, fancy food, or whatever else you want. While it looks like that on the surface, what is really happening?

What is a Credit Card?

A credit card is an unsecured loan. Each time you swipe that credit card, you are making a small unsecured loan on the promise of repayment. The problem is, the loan is with the credit card company, not with the merchant who is providing you with what you want. So, how does your loan get to the merchant?

When you get your loan from the credit card company, they immediately get a loan from the merchant. In other words, the credit is not begin with the credit card company, but begins with the merchant! Understand that credit card companies have nothing to lend! They are a middleman between you and the merchant and the credit card company takes a nice cut for this service.

You tell the credit card company you want to borrow food from the merchant. The credit card company already has an unlimited line of credit with the merchant. You use the credit card company’s line of credit to get the food from the merchant. The merchant sends a bill to the credit card company. The credit card company then sends you a statement, including the bill. You pay the statement. The credit card company takes a cut and pays the merchant.  

What Do They Have To Lose?

When you understand that the credit card company does not lend you anything, it should be clear to see that they never lose money… EVER! It doesn’t matter if you don’t pay a bill, if the account goes to collection, or if they have to write it off because of the statute of limitations. The credit card companies still never lose! What simply happens is the credit card company loses its profit from the transaction.

You may be wondering, if the merchant provided the service/product/item, who pays when a bill goes uncollected? The answer to this question is beyond the scope of this article, but the simple answer is everyone pays, EXCEPT the credit card company.

Myth 2: Credit Card Companies Have Money.

If you ever read a credit card agreement, bank literature, checking or savings account contracts, you may notice that they very rarely use the word money anywhere in them. That is because our financial system is a credit-based system, not a money-based system.

What is the difference?

When you use money, credit cards cannot exist. Or, at the very least, they will be much reduced than they are today. The expense of transporting money from location to location, merchant to merchant becomes cost prohibitive when you consider the trillions of transactions that occur every day by credit card.

Myth 3: Credit Cards Make Life More Convenient.

It is easy to go to the grocery store and pay for everything with just one swipe of a card, without having to write a check, or count out dollar bills and change. However, with credit cards come risks.

Too often people don’t check their receipts. Too often, people make impulse purchases or overpay or are outright defrauded because they assume the cashier or the screen or the teller added everything the way you expected. Too often, people are victimized by giving their credit card to a waiter, or using it on the internet.

Sometimes, convenience is not the goal when conducting your day-to-day business. Your goal may be to get the best price, the best deal, or to protect your identity or your safety. The draw of convenience has turned credit cards into very inconvenient experiences of debt, loss, and injury.

Credit Cards Rely On Trust.

The entire credit card phenomenon relies on a circle of trust between merchants, customers, borrowers, and lenders. The entire process relies on everyone trusting the credit card company to handle the transaction, prepare the statements, handle the payments, and settle the accounts. It makes everyone extremely dependent on them in these transactions.

For this reason, the credit card companies have the power to demand payments from the borrower and the merchant that may be difficult to resist. In other words, the credit card companies have you at their mercy! To combat this, you need information. You need to know your credit score. You also need to stay on top of your credit report. It is the only way to counter the tremendous advantage the credit card companies have over you.

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