What Is a Credit Card?

A credit card is a versatile financial tool issued by banks or financial institutions, usually made of plastic or metal. It enables cardholders to make purchases and payments with borrowed funds. Users are required to repay the borrowed amount along with any applicable interest and fees either in full by the due date or over time.

Aside from the standard credit line, credit card issuers may offer a cash line of credit to cardholders, allowing them to access cash via ATMs, bank tellers, or convenience checks. Cash advances often come with different terms such as higher interest rates and no grace period. Credit limits are typically determined based on the individual’s creditworthiness. Credit cards are widely accepted by merchants and remain a popular payment method for various goods and services.

Key Takeaways

• Credit cards allow for convenient payments and come with the responsibility of repaying borrowed funds.
• Interest charges apply to outstanding balances on credit cards.
• Various institutions issue credit cards, offering benefits like cash back, discounts, or travel rewards.
• Secured and debit cards cater to individuals with limited or poor credit.

Investopedia / Ellen Lindner

Understanding Credit Cards

Credit cards typically carry higher APRs compared to other consumer loans. Interest charges on unpaid balances usually start about a month after a purchase, unless there’s a 0% APR offer in place. Understanding the grace period and how interest accrues is essential for managing credit card debt effectively.

By law, credit card issuers must provide a minimum 21-day grace period before interest accrues on new purchases. Paying balances before this period ends is crucial to avoid additional interest charges. Knowing whether interest is calculated daily or monthly is important for balancing and transferring credit card debt effectively.

Individuals with poor credit often opt for secured credit cards that require a deposit. These cards allow for the establishment of credit through responsible use over time.

Types of Credit Cards

Major credit cards like Visa, Mastercard, Discover, and American Express are issued by financial institutions and offer various perks such as travel miles, cash back, and gift certificates. These are commonly known as rewards credit cards.

National retailers often issue branded credit cards to build customer loyalty. These cards may provide discounts and benefits specific to the retailer. Some retailers offer co-branded cards that can be used anywhere, not just at their stores.

Secured credit cards require a deposit and cater to individuals with limited or poor credit history. Prepaid debit cards function similarly to secure credit cards, with the funds matching the linked bank account balance.

Unsecured credit cards, in contrast to secured cards, do not need a deposit and offer higher credit limits and lower interest rates. Building credit history with responsible credit card use can lead to credit score improvement and enhanced borrowing opportunities.

Sabrina Jiang © Investopedia 2020

Building Credit History with Credit Cards

Responsible use of regular, secured, and non-secured credit cards helps build a positive credit history. Timely payments and managing credit utilization are vital for improving credit scores and potentially upgrading to better card options.

Building good credit involves making on-time payments, controlling credit utilization, and maintaining a healthy debt-to-income ratio. Responsible credit card use can enhance creditworthiness and increase borrowing capacity.

How do I get a credit card if I don’t have any credit?

Establishing credit without a credit history can be challenging. Secured credit cards offer a starting point by requiring a deposit, minimizing risk for lenders while enabling users to demonstrate their financial habits. Another option is to become an authorized user on an existing credit account to benefit from the cardholder’s positive credit history.

Do credit cards have fixed or variable annual percentage rates (APRs)?

Most credit cards feature both fixed and variable APRs. Reviewing the card’s agreement discloses the type of APR in play. Stay informed about any changes in fixed APRs and be aware of variable rates for different transactions.

What is a credit card annual fee?

The annual fee on a credit card is a charge by the issuer for extending credit. Some cards waive this fee, while others, often those with rewards, may have annual fees ranging from $50 to $700.

What is the difference between the transaction date and the posting date?

The transaction date marks when a purchase or payment is made, while the posting date is when the transaction is reflected in the account balance. Understanding these dates is essential for managing credit card activity effectively.