What is a credit card? - General FAQ

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Credit Card Applications » Questions » FAQs » General » What is a credit card?

What is a credit card?

Answered on | Updated: December 28th, 2017
The content is accurate at the time of publication and is subject to change.

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.

Cashback and other 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. For example, the Discover it® Miles credit card, that offers miles rewards on all purchases, has no annual fee.

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.

Some important tips for credit card holders

  1. When you use a credit card, it’s not free money, but the money that you borrow from a bank. Therefore you should treat your debts and spendings responsibly. Don’t carry a balance, try to pay it off before the due date, or you will be hit by the late payment fee and in most cases have interest added to your balance;
  2. Try to improve your credit score. To do this, you need to make payments regularly. A good credit score gives you an access to cards with better terms and conditions, the ones that let you save money or earn rewards.
  3. Keep track of your credit limit. Don’t max out your credit card, try to increase your credit limit (if you don’t have bad things ob your credit report, a credit card issuer may increase your credit limit if you ask). A large credit limit may improve your credit score, because it affects your credit utilization ratio.
  4. Don’t be afraid to apply for new credit cards – but only if you can manage them. More credit cards give you more cumulative credit limit, but if you have troubles keeping track of your debtsm due dates and purchases, than fewer credit cards are better than a lot of debt. Be prudent and plan your moves well.

A good credit card may be a helping hand, providing you with a nice opportunity to improve your life and spending habits, make you more responsible and financially educated. If you are ready to apply for a credit card, look through our specially selected best credit cards.
If you are not sure where to start, then you need some help, and we are there for you! Check out our tool that will navigate you in the world of credit cards here >>

Disclaimer: This editorial content is not provided or commissioned by the credit card issuer(s). Opinions expressed here are the author's alone, not those of the credit card issuer(s), and have not been reviewed, approved or otherwise endorsed by the credit card issuer(s). Reasonable efforts are made to present accurate information, however all information is presented without warranty. Consult a card's issuing bank for the terms & conditions.
All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.
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