What Are Credit Cards?

A credit card looks very similar to a debit card: it’s made from plastic (sometimes metal), is rectangular, has a 16-digit card number, expiration date, and a personal identification number (PIN). And, like debit cards, credit cards are issued by banks, although another type of financial institution can also allocate them. 

When you use a credit card to make purchases, the money comes from the bank. Because the institution lends the funds to you, you are expected to repay the institution with interest every month or over a set amount of time. There are many different types of credit cards available, depending on your needs and spending habits, but the Citi Rewards+℠ Card is one example.

On top of the standard line of credit the bank extends to you, it could approve a cash line of credit (LOC), allowing you to withdraw cash from ATMs, bank tellers, or checks. Unlike purchases made using a standard credit line, these cash advances usually come with separate conditions, like higher monthly interest and no grace period.

Credit card issuers typically have predetermined borrowing limits that vary according to your credit rating. The better your credit, the higher your spending limit, and vice versa. Nearly every merchant in the world accepts credit cards as a form of payment, making them one of the most convenient ways to pay for purchases you make every day.

What You Should Know About Credit Cards

Compared to other types of consumer loans (such as auto loans, mortgage loans, etc.), credit cards often have a higher annual percentage rate (APR). If you fail to make your monthly payment, the interest on the unpaid balance is imposed about one month from the date of the purchase (besides instances where the credit card offers 0% APR for a certain amount of time as part of a sign-up bonus). However, you won’t qualify for this grace period if you already have unpaid balances that rollover from an earlier month.

Credit card issuers are legally required to extend a 21-day minimum grace period before levying interest on any purchases made that month. For this reason, it’s always ideal to repay balances before the end of the grace period whenever possible. 

Additionally, it would help if you also determined whether your credit card provider collects interest daily or monthly. Daily interest can quickly snowball into substantial interest payments until you pay off your balance. It’s particularly important to understand if you want to move your current balance to a credit card with a lower interest rate. Transferring from a card with a monthly interest rate to one with daily accrual could offset the benefits of a lower rate.

If you have bad credit, you may be eligible for a secured credit card. You pay an initial deposit fee that the bank holds as collateral to receive a credit line.

Types Of Credit Cards

You are probably familiar with many credit cards, such as Visa, MasterCard, Discover, and American Express. Financial institutions such as banks and credit unions provide these cards. Most credit cards offer lucrative incentives and rewards programs like points, cashback, hotel discounts, travel perks, flight miles, gift cards, and more. These are typically known as rewards credit cards.

On the other hand, branded credit cards encourage customer loyalty. These cards have the retailer’s name on the card and usually have a higher chance of approval than standard credit cards. However, you can only use this type of credit card to buy goods or services from specific retailers. In exchange, the companies will provide you with rewards like exclusive discounts, promotions, or sales. Depending on the company, you may even be able to use your branded credit card for everyday purchases.

As mentioned earlier, secured credit cards are a type of card where you can only receive a credit line after making an initial deposit. Because secured credit cards are often reserved for those in poor credit standing, issuers often offer smaller credit lines that may not exceed the amount of the deposit. However, secured credit cards can be an excellent way for people with bad credit to improve their scores. If you regularly pay off your monthly payments, the bank will return your deposit and potentially offer you an upgraded credit card.

Prepaid debit cards are a category of secured credit cards. With this type of card, the money you can use for purchases is connected to a checking and savings account. Conversely, unsecured credit cards don’t ask new cardholders to make a deposit or offer an asset as collateral. These cards also have a higher spending limit and minimal interest rates. 

Using Credit Cards To Build Credit History

When you use regular, non-secure, or secure credit cards responsibly, you can build a solid credit history. At the same time, you don’t need to make sure you have cash on hand when you go to the store, and you can buy items online. 

Because credit card issuers report your activity to the major credit bureaus, you have an excellent opportunity to improve your credit score and possibly receive a bigger line of credit before getting approved for a standard credit card.

 

Source
  • Bloomenthal, Andrew. “How Credit Cards Work.” Investopedia, Investopedia, 10 Sept. 2020, www.investopedia.com/terms/c/creditcard.asp.
Ian Schindler