What is a Credit Card?
A credit card is a compact, rectangular piece of plastic or metal issued by a bank or financial institution. It allows the cardholder to borrow funds to make purchases with merchants that accept credit card payments. This borrowed money must be paid back, along with any interest and other stipulated charges, either by the billing date or over time.
Besides the usual credit line, credit card issuers may offer a separate cash line of credit (LOC), enabling cardholders to borrow money as cash advances. These advances can be obtained from bank tellers, ATMs, or via credit card convenience checks. Cash advances often have different terms, such as higher interest rates and no grace period, compared to regular transactions. Issuers typically set borrowing limits based on an individual’s credit rating. Credit cards have become one of the most popular methods for purchasing goods and services globally.
Key Takeaways
- Credit cards are plastic or metal cards used to pay for items or services using credit.
- Interest charges apply to borrowed money.
- Credit cards may offer perks, including cashback, discounts, or reward miles.
- Secured credit cards and debit cards are available for those with poor or limited credit.
Understanding Credit Cards
Interest charges, calculated annually as an Annual Percentage Rate (APR), typically apply to any unpaid balances once the grace period ends. By law, issuers must give cardholders a minimum of 21 days before interest on new purchases starts accruing. Paying off balances within this window is a good financial practice.
Knowing whether your issuer calculates interest daily or monthly is also essential, especially if you’re transferring balances between cards to benefit from a lower APR. Switching from a monthly accrual card to a daily one could negate the potential savings.
Individuals with poor credit often start rebuilding with secured credit cards, which require an upfront cash deposit. These cards then afford credit lines equivalent to the deposits and can help build positive credit habits over time.
Types of Credit Cards
Most major credit cards, including Visa, Mastercard, Discover, and American Express, are issued by banks or other financial institutions. Many offer attractive rewards such as airline miles, hotel stays, gift certificates, or cashback on purchases. These are called rewards credit cards.
Some national retailers issue branded credit cards displaying the store’s name. These are often easier to qualify for than major credit cards but can only be used within the issuing retailer’s network. Co-branded Visa or Mastercard cards, issued by these retailers, can be used most anywhere.
Secured credit cards require a cardholder to secure the card with a cash deposit. They offer limited credit lines equal to the deposits, often returned after responsible use. Those with poor or limited credit opt for these cards to build or repair their credit.
Prepaid debit cards, linked to bank accounts, are another secured payment option. Conversely, unsecured credit cards don’t require any deposits, often offering higher credit lines and lower interest rates.
Building Credit History with Credit Cards
When used responsibly, both secured and unsecured cards can help consumers build a positive credit history. Payment and purchase activities are reported to major credit agencies, aiding in improving credit scores. In time, secured cardholders may transition to regular credit cards.
A good credit history involves regular, on-time payments, avoiding late payments, keeping credit utilization low, and maintaining a low debt-to-income ratio. Making responsible purchases and paying them off helps improve a credit score, making one more appealing to lenders.
How Do I Get a Credit Card if I Don’t Have Any Credit?
Starting from scratch can feel like a catch-22 since lenders are wary of unproven borrowers. Opening a secured credit card is a straightforward way to build credit. As you borrow against your deposit, lenders can gauge your spending and repayment behavior.
Another route is becoming an authorized user on someone else’s established credit account, like a parent or spouse. This approach incorporates that account’s history into your credit report – provided they have stellar financial habits, or else it could negatively impact you.
FAQs
Do Credit Cards Have Fixed or Variable Annual Percentage Rates (APRs)?
Credit cards can have either fixed or variable APRs. Check your cardholder agreement to find out. Legally, issuers must disclose your APR type and notify you if it changes.
Some cards have fixed APRs for purchases but variable ones for cash advances. Always read the fine print.
What is a Credit Card Annual Fee?
An annual fee is charged by the card issuer for the privilege of using the card. Fees can range from $50 to $700, usually found on cards offering significant rewards or perks.
What is the Difference Between the Transaction Date and the Posting Date?
The transaction date is when you make a purchase or payment with your card. This will move into a pending category during processing. The posting date is when the transaction reflects in your account balance.
Related Terms: annual percentage rate, credit line, interest rate, secured card, credit score.
References
- Federal Trade Commission. “Credit Card Accountability Responsibility and Disclosure Act of 2009”, Page 10.
- Experian. “How to Get a Credit Card If You Don’t Have a Credit History”.
- Capital One. “Fixed APRs vs. Variable APRs”.
