Credit cards are a popular way to make purchases, pay bills and even help manage debt in some cases. They’re quite convenient and many may offer the chance to earn rewards.
Below, we’ll break down the things you need to know about credit cards: what they are (and how they’re different from debit cards), how they work and the different types. We’ll also review why and how to get a credit card, as well as some tips for using cards to build your credit score.
What is a credit card and how does it work?
A credit card is a form of revolving credit — meaning you can borrow with it whenever you want (up to a limit) and pay it off when it’s due.
Important terms to know
Here are some important credit card terms to know.
- Annual fee: Some cards charge a fee once per year for use of the card.
- Balance: The amount of borrowed funds on your card that you haven’t paid off.
- Credit limit: The maximum balance you can incur on your credit card.
- Credit card network: Credit card networks authorize and process credit card transactions. They facilitate information transfer between merchants and issuers.
- Interest/APR: Interest is the amount charged on the balance you carry, expressed as a percent. APR is interest plus applicable fees and your card can have multiple APRs (purchases, cash advances and balance transfer)
- Issuer: The bank or financial institution that gives you your credit card. You make payments to your credit card issuer.
- Minimum payment: The minimum amount you must pay by the statement due date for each billing period.
How credit cards work
To use a credit card, you simply swipe, insert or tap your card at the card reader when checking out. If you’re paying a bill or shopping online, you’ll have to enter your card number, expiration date and sometimes the three- or four-digit security code on the back of your card.
The merchant then contacts your card company to request an authorization code for the transaction. If approved, the transaction will go through and funds will transfer from the issuer to the merchant.
Every billing period (around 28-31 days), you receive a statement containing all of your transactions for that period, your total balance and your minimum payment. You then get a grace period (usually 21 days, but varies by the card issuer) to pay at least the minimum.
If you don’t pay the full balance, your issuer charges interest based on your …….