What Is a Credit Card?All plastic payment methods — with the admitted exception of gift cards — look virtually the same: name, account number, magnetic stripe and, most recently, that little EMV chip on the left side. But don’t let appearances fool you: credit cards are very different than debit cards and their prepaid counterparts, pretty much every way you slice it.
A credit card, after all, isn’t just a payment method — it’s a loan. Every time you swipe, you’re using part of your pre-approved credit limit (read: the bank’s money) to make that purchase. You’re expected to pay at least part of those purchases back at the end of each month. When you swipe a debit card, on the other hand, you’re using the funds in your checking account (read: your money) to buy stuff, so you won’t owe your bank anything, outside of overdrafts and other checking account fees. As part of this in-depth credit card definition, we’ll dive into what a credit card actually is, the pros and cons associated with having one and the different types of credit cards that are out there in the marketplace, so you can decide which one, if any, is right for you.
What’s a Credit Card?A credit card is a payment method, yes, but it’s also a revolving credit account. Revolving credit accounts, unlike installment loans, don’t require a fixed payment each month. Instead, account holders are approved for a pre-set credit limit that they can use as they please — so long as they make a minimum payment each billing cycle. Minimum payments on credit cards are typically between 1% to 3% of your total outstanding balance, but the exact stipulation will vary from issuer to issuer. Of course, whatever you don’t pay off by your statement’s due date will begin to accrue interest. Credit cards tout annual percentage rates (APRs) on everything from purchases to balance transfers to cash advances. You also may face a penalty APR on balances if you miss a payment. Credit card APRs can be either variable, meaning they go up or down depending on the U.S. Prime Rate, or fixed, meaning that they don’t. Generally, credit cards have a variable APR, but the specifics will always be marked in the credit card terms and conditions you should read through before you apply.
The Pros & Cons of Credit CardsFor people who use them responsibly, a credit card can be a great spending tool. Since a credit card is a loan, your account will build credit — but unlike installment loans, such as a student loan, auto loan or mortgage, which all involve a fixed monthly payment at a set interest rate over a specified period of time, you can avoid paying interest on a credit card entirely. Plus, many credit cards offer rewards: cardholders can receive points, miles or cash back on their purchases and, even, ancillary benefits, like purchase protection, price protection, extended warranties and certain travel insurance.
Having said that, for people who don’t use them responsibly, a credit card can be a quick way to end up in dire straits. The interest on credit card balances adds up quickly. For example, let’s say you have a $1,000 balance on a card with a 15% APR and you can only make the minimum payment of $20 (2% of the balance) for the entire 118 months it would take you to pay it back that way. You’d wind up paying a whopping $851 in interest by the time that balance is gone, almost doubling what you initially charged.
Plus, credit cards often come with a laundry list of other fees or charges that get imposed when you slip up, among them, penalty APRs, late payment fees, over-the-limit fees and returned payment fees. You’ll also pay fees for certain services, like balance transfers, foreign transactions or even having the card in the first place (known as an annual fee). Here’s a rundown of the pros and cons associated with credit cards.
Pros of Credit Cards
Your credit utilization rate is how much debt you’re carrying versus your total available revolving credit (i.e. your card’s credit limit). It’s generally advised that you keep the amount of debt you owe on each card and collectively below at least 30% and ideally 10% of your total available limit(s), so if you can’t pay those puppies off in full each month, it’s a good idea to, at the very least, try to meet those targets.
How Do I Get a Credit Card?Credit cards are issued by banks, credit unions and other financial institutions, though there are some exceptions (see: store credit cards). You can get one by filling out a credit card application either online or at bricks-and-mortar branch. When you fill out the application, the issuer will ask for your personal and income information, than they’ll pull a version of your credit report and credit score. Your credit score will be used to determine whether you qualify for a card and, if so, what interest rate you’ll pay. Your income information is generally used to determine what credit limit you’ll be offered.
You don’t need good credit to get a credit card. As we mentioned earlier, there are cards designed specifically with people that have bad or thin credit in mind. But you do need a credit score to qualify for the better products out there and/or the lowest rates or fees
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A credit card, after all, isn’t just a payment method — it’s a loan. Every time you swipe, you’re using part of your pre-approved credit limit (read: the bank’s money) to make that purchase. You’re expected to pay at least part of those purchases back at the end of each month. When you swipe a debit card, on the other hand, you’re using the funds in your checking account (read: your money) to buy stuff, so you won’t owe your bank anything, outside of overdrafts and other checking account fees. As part of this in-depth credit card definition, we’ll dive into what a credit card actually is, the pros and cons associated with having one and the different types of credit cards that are out there in the marketplace, so you can decide which one, if any, is right for you.
What’s a Credit Card?A credit card is a payment method, yes, but it’s also a revolving credit account. Revolving credit accounts, unlike installment loans, don’t require a fixed payment each month. Instead, account holders are approved for a pre-set credit limit that they can use as they please — so long as they make a minimum payment each billing cycle. Minimum payments on credit cards are typically between 1% to 3% of your total outstanding balance, but the exact stipulation will vary from issuer to issuer. Of course, whatever you don’t pay off by your statement’s due date will begin to accrue interest. Credit cards tout annual percentage rates (APRs) on everything from purchases to balance transfers to cash advances. You also may face a penalty APR on balances if you miss a payment. Credit card APRs can be either variable, meaning they go up or down depending on the U.S. Prime Rate, or fixed, meaning that they don’t. Generally, credit cards have a variable APR, but the specifics will always be marked in the credit card terms and conditions you should read through before you apply.
The Pros & Cons of Credit CardsFor people who use them responsibly, a credit card can be a great spending tool. Since a credit card is a loan, your account will build credit — but unlike installment loans, such as a student loan, auto loan or mortgage, which all involve a fixed monthly payment at a set interest rate over a specified period of time, you can avoid paying interest on a credit card entirely. Plus, many credit cards offer rewards: cardholders can receive points, miles or cash back on their purchases and, even, ancillary benefits, like purchase protection, price protection, extended warranties and certain travel insurance.
Having said that, for people who don’t use them responsibly, a credit card can be a quick way to end up in dire straits. The interest on credit card balances adds up quickly. For example, let’s say you have a $1,000 balance on a card with a 15% APR and you can only make the minimum payment of $20 (2% of the balance) for the entire 118 months it would take you to pay it back that way. You’d wind up paying a whopping $851 in interest by the time that balance is gone, almost doubling what you initially charged.
Plus, credit cards often come with a laundry list of other fees or charges that get imposed when you slip up, among them, penalty APRs, late payment fees, over-the-limit fees and returned payment fees. You’ll also pay fees for certain services, like balance transfers, foreign transactions or even having the card in the first place (known as an annual fee). Here’s a rundown of the pros and cons associated with credit cards.
Pros of Credit Cards
- They help you build credit, unlike debit cards or prepaid debit cards, which are not loans and, therefore, don’t get reported to the three major credit reporting agencies.
- They provide short-term or long-term liquidity in case of emergencies or beyond.
- They feature better built-in fraud protections than debit cards, thanks to differences in federal laws. Credit cardholders can only be held liable for $50 of fraudulent charges and most issuers have zero-liability policies that supercede that. Debit cardholders, conversely, can be held liable for only $50 if they report fraud within two days and up to $500 if they report within 60 days. Beyond that, they could wind up paying all those fraudulent charges.
- They’re also safer than carrying around tons of cash.
- Many credit cards reward account holders for their purchase in the form of points, miles or cash back.
- Many credit cards also feature ancillary benefits, like travel insurance, extra car rental insurance or price protection, that can help consumers save or get out of a jam.
- Credit cards issued by major networks, like Visa and MasterCard, are accepted virtually everywhere.
- You pay interest on charges you don’t pay off in full each month.
- That interest can accumulate quickly and land you in serious credit card debt. Credit card debt represents all the purchases you made with the card, plus the interest you owe on them.
- Missing payments and running up big balances will do big damage to your credit score — and make it harder to secure other financing in the future.
- Credit cards can be terribly convenient, yes, but that makes it a whole lot easier to overspend.
- You’ll pay extra fees, too, if you miss payments or go over your limit.
- Some credit cards come with annual fees that a person may or may not recoup in rewards. In fact, some starter credit cards carry annual fees since issuers are technically taking a risk on people with thin-to-bad credit, so you’re essentially paying for the opportunity to build or rebuild your score.
Your credit utilization rate is how much debt you’re carrying versus your total available revolving credit (i.e. your card’s credit limit). It’s generally advised that you keep the amount of debt you owe on each card and collectively below at least 30% and ideally 10% of your total available limit(s), so if you can’t pay those puppies off in full each month, it’s a good idea to, at the very least, try to meet those targets.
How Do I Get a Credit Card?Credit cards are issued by banks, credit unions and other financial institutions, though there are some exceptions (see: store credit cards). You can get one by filling out a credit card application either online or at bricks-and-mortar branch. When you fill out the application, the issuer will ask for your personal and income information, than they’ll pull a version of your credit report and credit score. Your credit score will be used to determine whether you qualify for a card and, if so, what interest rate you’ll pay. Your income information is generally used to determine what credit limit you’ll be offered.
You don’t need good credit to get a credit card. As we mentioned earlier, there are cards designed specifically with people that have bad or thin credit in mind. But you do need a credit score to qualify for the better products out there and/or the lowest rates or fees
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