What Is A Credit Card?
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A credit card accesses a line of credit issued by a bank or other financial institution. You use a physical plastic card to tap into it when it's swiped at a Point of Sale (POS) terminal at a retailer, but you can also access the credit via an online transaction by using your account information. With a credit card, the issuer pays when you purchase something and you're obligated to pay that amount back later. If you carry an unpaid balance on your account, you'll accrue interest charges that you must pay back as well. In most cases, paying your balances in full each month avoids interest charges. You may also be responsible for monthly or annual fees depending on the issuer and the agreement terms.
Types of Cards
There are two primary categories of credit card: standard (also referred to as unsecured) credit cards and secured credit cards.
These cards are completely unsecured, which means that you put no deposit or collateral down in order to have access to the line of credit. There are varieties of different standard credit cards including:
Each type of card will have different incentives and benefits for using it to make purchases. For example, rewards cards may allow you to accrue points that you can redeem for merchandise or they may pay you a small percentage of cash back for every purchase you make. Balance transfer cards allow a consumer to move balances from a high interest account, or from multiple accounts, onto a credit card with a low introductory interest rate. Frequent flyer credit cards typically allow the user to earn airline mile credits that can be redeemed for future flights.
Secured credit cards are most often used by people who have less than perfect credit or who have a very limited credit history. These cards require collateral, and typically, the amount of the security deposit is equal to the amount of credit granted. For example, if you provide the issuer with $500 in collateral, they will approve you for a credit card that will have a $500 limit. You can use the card to make purchases up to $500 and as long as you pay those obligations back, you will be able to utilize that line of credit repeatedly.
There are also products called prepaid credit cards, but in reality, they are not credit cards at all. You don't have a line of credit issued; instead, you are required to transfer money to the issuer before they give you a card, and then you can use that card for purchases up to the amount that you transferred. The benefit is that they can usually be used anywhere credit cards are accepted and may be easier or safer to use for transactions than carrying around a lot of cash.
What Credit Card Is Right For Me?
Every consumer, or small business owner, has a different credit history, different needs, and different reasons for wanting to use a credit card instead of cash. With literally hundreds of options, you should be able to find a card that will fit your needs. The type of card depends on your unique credit situation.
For newer borrowers, a secured or unsecured credit card will usually be a great option to start building up your credit. Even if it's just a limit of a few hundred dollars to start, an unsecured card can show you're a worthy borrower. By charging and then paying off your balance each month, you'll prove that you can manage credit wisely. Over time, you'll be able to apply for premium cards that offer higher approval amounts and lower interest. If you don't qualify for an unsecured credit card, you may want to try for a retail or secured card. These cards are good for all credit types and can help even those just out of bankruptcy.
- Unsecured Credit Card – An unsecured card is what's known as a revolving line of credit. Revolving credit only requires a minimum payment and does not have a set pay off term. Any money that's left unpaid at the end of each billing cycle is carried over to the next month. Interest is then charged on that balance.
- Secured Credit Card – A secured card is attached to collateral, such as cash, that is normally held in your bank account. This means that the limit on your secured card will be the amount of money you have in your checking account. (Payments for purchases made with a secured credit card will not be drawn from your bank account.)
- Retail Cards – This type of card is provided by a retail store. Generally, retail credit cards are easier to obtain than traditional unsecured cards. Please keep in mind that every time you apply for a new card, the card issuer will pull your credit report. Several searches or hard credit inquiries on your report in a short period may lower your score.
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