What Is a Credit Card?
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt. The issuer of the card (usually a bank or credit union) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.
How Do Credit Cards Work?
When you use a credit card to make a purchase, the credit card issuer pays the merchant on your behalf. You then owe the credit card issuer the money you spent. You will receive a bill, typically once a month, that lists all your purchases. You are required to pay at least the minimum payment by the due date. If you pay the entire balance by the due date, you generally won't be charged interest on your purchases. If you carry a balance from one month to the next, you will be charged interest on the outstanding amount.
Common Types of Credit Cards
There are several types of credit cards designed to meet different needs:
- Rewards Cards: These cards offer rewards in the form of cashback, points for travel, or other benefits for every dollar you spend.
- Balance Transfer Cards: These are designed for people who want to transfer debt from a high-interest credit card to one with a lower introductory interest rate, often 0% for a promotional period.
- Secured Credit Cards: These cards require a security deposit and are a good option for people with a limited credit history or a poor credit score who are looking to build or rebuild their credit.
- Student Credit Cards: These are aimed at college students and often have more lenient credit requirements and lower credit limits.
Understanding Interest (APR)
The Annual Percentage Rate (APR) is the interest rate you're charged if you carry a balance on your credit card. The APR can be fixed or variable. It's crucial to understand your card's APR, as carrying a high balance can lead to significant interest charges over time.