A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. Credit cards impose the condition that cardholders pay back the borrowed money, plus any applicable interest, as well as any additional agreed-upon charges, either in full by the billing date or over time.
In addition to the standard credit line, the credit card issuer may also grant a separate cash line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that can be accessed through bank tellers, ATMs, or credit card convenience checks. Such cash advances typically have different terms, such as no grace period and higher interest rates, compared with those transactions that access the main credit line.
Issuers customarily preset borrowing limits based on an individual’s credit rating. A vast majority of businesses let the customer make purchases with credit cards, which remain one of today’s most popular payment methodologies for buying consumer goods and services.
Credit cards typically charge a higher annual percentage rate (APR) vs. other forms of consumer loans. Interest charges on any unpaid balances charged to the card are typically imposed approximately one month after a purchase is made (except in cases where there is a 0% APR introductory offer in place for an initial period of time after account opening), unless previous unpaid balances had been carried forward from a previous month—in which case there is no grace period granted for new charges.
Credit card issuers are required by law to provide a grace period of at least 21 days before interest accrues on purchases.
This is why it is a good practice to pay off your debts as early as possible before the expiration of your grace period. It is also important to understand whether issuers compound interest on a daily or monthly basis. This is because the former results in a higher interest rate until the balance is paid off. This is especially important to know if you plan to transfer your credit card balance to a card with a lower interest rate. Inadvertently switching from a monthly savings card to a daily savings card could potentially negate a lower percentage of your savings.
Most major credit cards—which include Visa, Mastercard, Discover, and American Express—are issued by banks, credit unions, or other financial institutions. Many credit cards attract customers by offering incentives such as airline miles, hotel room rentals, gift certificates to major retailers, and cash back on purchases. These types of credit cards are generally referred to as rewards credit cards.
To generate customer loyalty, many national retailers issue branded versions of credit cards, with the store’s name emblazoned on the face of the cards. Although it’s typically easier for consumers to qualify for a store credit card than for a major credit card, store cards may be used only to make purchases from the issuing retailers, which may offer cardholders perks such as special discounts, promotional notices, or special sales.
Some large retailers also offer co-branded major Visa or Mastercard credit cards that can be used anywhere, not just in retailer stores.
Secured credit cards are a type of credit card where the cardholder secures the card with a security deposit. Such cards offer limited lines of credit that are equal in value to the security deposits, which are often refunded after cardholders demonstrate repeated and responsible card usage over time. These cards are frequently sought by individuals with limited or poor credit histories.
Similar to a secured credit card, a prepaid debit card is a type of secured payment card, where the available funds match the money that someone already has parked in a linked bank account.
By contrast, unsecured credit cards do not require security deposits or collateral. These cards tend to offer higher lines of credit and lower interest rates vs. secured cards.
When used responsibly, regular, non-secured, and secured cards can help consumers build a positive credit history while providing a way to make online purchases and eliminate the need to carry cash. Since both types of credit cards report payments and purchasing activity to the major credit agencies, cardholders who use their card responsibly can build strong credit scores and potentially extend their lines of credit and—in the case of secured cards—potentially upgrade to a regular credit card.
Building a good credit history is a combination of several factors, such as making regular and timely payments, avoiding delinquencies, using credit within your credit limits, and maintaining a low debt-to-income ratio. By making responsible purchases and paying on time, your credit score will improve and consumers will be more attractive to other lenders.
Creating a credit history can be a bit of a catch-22. If you have no credit, you are less likely to be approved by a merchant or bank because you are an unauthorized borrower.
Opening a secure credit card is one of the easiest ways to get started. Because the spender borrows only from the money they deposit, there is little risk to the lender, which gives them an idea of their spending and repayment habits.
Another way to start accumulating credit is to become an authorized user of an existing credit account, such as a parent or spouse. The credit history of the cardholder is displayed on the account, extending the validity of the credit report. However, make sure your partner has good credit habits.
If their financial choices are bad, it will reflect on you as well.
Many credit cards have two types of Annual Percentage Rate (APR). Read the cardholder agreement that came with your credit card to find out what type of APR you have. Card issuers are legally required to disclose the type and content of APRs they hold.
Consumers should be alerted when the fixed annual interest rate changes.
Some credit cards have a fixed annual rate on purchases, but a variable annual rate on cash advances or late fees. Read the fine print to find out.
The credit card annual fee is a fee charged by the card issuer for issuing a credit card.
Some cards do not charge an annual fee, while others (mostly cards that offer rewards or incentives such as cashback) may charge an annual fee ranging from $50 to $700.
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