
Credit Card
A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company, that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. Since both types of credit cards report payments and purchasing activity to the major credit agencies, cardholders who use their card responsibly can build strong credit scores and potentially extend their lines of credit and_ — _in the case of secured cards_ — _potentially upgrade to a regular credit card. In addition to the standard credit line, the credit card issuer may also grant a separate cash line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that can be accessed through bank tellers, ATMs or credit card convenience checks. Although it's typically easier for consumers to qualify for a store credit card than for a major credit card, store cards may only be used to make purchases from the issuing retailers, which may offer cardholders perks such as special discounts, promotional notices, or special sales. Individuals with poor credit histories often seek secured credit cards, which require cash deposits, that afford them commensurate lines of credit.
What Is a Credit Card?
A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company, that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. Credit cards impose the condition that cardholders pay back the borrowed money, plus any applicable interest, as well as any additional agreed-upon charges, either in full by the billing date or over time. An example of a credit card is the Chase Sapphire Reserve. (You can read our Chase Sapphire Reserve credit card review to get a good sense of all the various attributes of a credit card).
In addition to the standard credit line, the credit card issuer may also grant a separate cash line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that can be accessed through bank tellers, ATMs or credit card convenience checks. Such cash advances typically have different terms, such as no grace period and higher interest rates, compared to those transactions that access the main credit line. Issuers customarily pre-set borrowing limits, based on an individual's credit rating. A vast majority of businesses let the customer make purchases with credit cards, which remain one of today's most popular payment methodologies for buying consumer goods and services.
Image by Sabrina Jiang © Investopedia 2020
Understanding Credit Cards
Credit cards typically charge a higher annual percentage rate (APR) versus other forms of consumer loans. Interest charges on any unpaid balances charged to the card are typically imposed approximately one month after a purchase is made (except in cases where there is a 0% APR introductory offer in place for an initial period of time after account opening), unless previous unpaid balances had been carried forward from a previous month_ — _in which case there is no grace period granted for new charges.
By law, credit card issuers must offer a grace period of at least 21 days before interest on purchases can begin to accrue. That's why paying off balances before the grace period expires is a good practice when possible. It is also important to understand whether your issuer accrues interest daily or monthly, as the former translates into higher interest charges for as long as the balance is not paid. This is especially important to know if you're looking to transfer your credit card balance to a card with a lower interest rate. Mistakenly switching from a monthly accrual card to a daily one may potentially nullify the savings from a lower rate.
Individuals with poor credit histories often seek secured credit cards, which require cash deposits, that afford them commensurate lines of credit.
Types of Credit Cards
Most major credit cards_ — which include Visa, Mastercard, Discover and American Express — _are issued by banks, credit unions or other financial institutions. Many credit cards attract customers by offering incentives such as airline miles, hotel room rentals, gift certificates to major retailers and cash back on purchases. These types of credit cards are generally referred to as rewards credit cards.
To generate customer loyalty, many national retailers issue branded versions of credit cards, with the store's name emblazoned on the face of the cards. Although it's typically easier for consumers to qualify for a store credit card than for a major credit card, store cards may only be used to make purchases from the issuing retailers, which may offer cardholders perks such as special discounts, promotional notices, or special sales. Some large retailers also offer co-branded major Visa or Mastercard credit cards that can be used anywhere, not just in retailer stores.
Secured credit cards are a type of credit card where the cardholder secures the card with a security deposit. Such cards offer limited lines of credit that are equal in value to the security deposits, which are often refunded after cardholders demonstrate repeated and responsible card usage over time. These cards are frequently sought by individuals with limited or poor credit histories.
Similar to a secured credit card, a prepaid debit card is a type of secured payment card, where the available funds match the money someone already has parked in a linked bank account. By contrast, unsecured credit cards do not require security deposits or collateral. These cards tend to offer higher lines of credit and lower interest rates vs. secured cards.
Building Credit History with Credit Cards
Regular, non-secured cards and secured cards, when used responsibly, can help consumers build a positive credit history while providing a way to make online purchases and eliminate the need to carry cash. Since both types of credit cards report payments and purchasing activity to the major credit agencies, cardholders who use their card responsibly can build strong credit scores and potentially extend their lines of credit and_ — in the case of secured cards — _potentially upgrade to a regular credit card.
Related terms:
Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the interest charged for borrowing that represents the actual yearly cost of the loan, expressed as a percentage. read more
Credit Card
Issued by a financial company giving the holder an option to borrow funds, credit cards charge interest and are primarily used for short-term financing. read more
Debit Card
A debit card lets consumers pay for purchases by deducting money from their checking account. Learn how debit cards work, their fees, and pros and cons. read more
Line of Credit (LOC) , Types, & Examples
A line of credit (LOC) is an arrangement between a bank and a customer that establishes a preset borrowing limit that can be drawn on repeatedly. read more
Plain Vanilla Card
A plain vanilla card is a basic credit card with no perks and few or no fees. read more
Purchase Rate
The purchase rate is the interest rate applied to credit card purchases and only applies to unpaid balances at the end of the billing cycle. read more
Revolving Credit
Revolving credit is an agreement that permits an account holder to borrow money repeatedly up to a set limit while repaying in installments. read more
Secured Credit Card
A secured credit card is a type of credit card that is backed by a cash deposit, which serves as collateral should you default on payments. read more
Semi-Secured Credit Card
A semi-secured credit card is offered to individuals who carry a higher credit risk. It offers credit, but also requires a deposit. read more
Credit Card Terms and Conditions
A credit card's terms and conditions officially document the rules and guidelines of the agreement between a credit card issuer and a cardholder. read more