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Credit cards are lines of credit. They can be used to make purchases, pay for services, make balance transfers and cash advances. You are required to pay back the loan amount in the future, but meanwhile you can make at least minimum payments every month before the due date. When you carry a balance, interest charges apply, and if you want to avoid interest payments, you should pay off the card balance each month by the due date.
When you use a credit card to make a purchase or any other transactions, three parties are involved: the buyer (you), seller, and the bank or issuing company that has loaned money to the buyer. For example, when you use your credit card to pay $50 for groceries, you are not paying directly to the grocery store. Instead, the issuer of your card pays the grocery store $50. Now you owe $50 your credit card issuer.
Credit cards come with an available credit limit that is provided to you by the issuer. If it is your first credit card, the issuer may only issue you a credit card with a $200 credit limit. This means you have only $200 of revolving credit to use. However, it does not mean you are stuck at it, most issuers allow credit limit increases over time for those who are managing their credit card responsibly and building up a good credit payment history.
It is relatively hard to get a credit card when you have no credit or a poor credit history. When you apply for a credit card, the issuer pulls your credit reports (sometimes from all three major credit bureaus) and evaluates your creditworthiness to determine how risky it is to lend you money.
Interest rates and fees
All credit cards have an Annual Percentage Rate (APR) on purchases, plus some may have APR on balance transfers, cash advance APR, and penalty APR. Most likely those interest rates are variable, meaning they will change as the Primary Rate changes. Sometimes issuers give low or 0% promo rates for a period of time. The minimum 0% intro APR lasts for 6 months.
Credit card fees vary as well. Your credit card may have an annual fee or an introductory annual fee. If you make a late payment, you can be charged a late payment fee. If your card allows cash advances and balance transfers, both cash advance fee and balance transfer fee may apply. When you are allowed to use your card abroad, a foreign transaction fee may be charged.
Credit score improving
Many people apply for a credit card to build or rebuild their credit score. Credit card issuers report monthly payments that you make to the three major credit bureaus - Experian, Equifax, and TransUnion. For example, if you use the card, it will be reported to all three major credit bureaus, plus you get access to your Experian credit score and credit report for free. Every on-time monthly payment is your contribution to the good rating of your credit score. When you use credit cards responsibly on a regular basis, have old credit card accounts, you have good chances to build perfect credit. Your responsible credit behavior shows lenders that you can manage credit.
Security and card theft
Credit cards are secure for consumers. When a fraud occurs - your card is stolen or your credit card information is stolen - the thief takes out money from your credit card issuer. You will very rarely be held responsible for fraudulent charges if you make an effort to report suspicious account activity as soon as you are aware of it. Under federal consumer protection law, you can never be held liable for more than $50 of fraudulent activity on a credit card.
Cashback and rewards
Credit card issuers do their best to entice you to apply for their credit cards, and rewards is one of the incentives. The most common credit card rewards are cash back, points and miles. Rewards can be redeemed for cash, gift cards, discounts and merchandize at certain retailers, airline tickets, hotel stays or statement credits. Many rewards credit cards come with annual fees but not all.
Some important credit card benefits at a glance:
- Credit cards can help you build better credit when you use them responsibly.
- Credit cards allow you to buy things and spread repayment out over time if you need to.
- Many credit cards offer rewards, such as cash back, miles, and points.
- If you lose your credit card, your personal liability for fraudulent charges on the credit card won't exceed $50, if you report it lost or stolen within 2 business days.