A credit card is a plastic or metal payment card that allows people to make purchases without having the money upfront, then pay back the card issuer over time. In return for the ability to make purchases on credit, the cardholder may have to pay interest or fees. Those fees and interest charges depend on the card and how soon the cardholder pays the bill in full.
Using a credit card responsibly also is one of the most efficient ways to build credit. Having a solid credit history is crucial for things like buying a house, purchasing a car or getting approved for a personal loan in the future.
Overview of How Credit Cards Work
Credit cards require regular payments to keep the account open and in good standing. To that end, cardholders receive a credit card statement once a month, which details purchases and payments made during that billing cycle and notes when a payment is next required.
If you pay for your purchases within the window of the grace period on the account (typically between 21 and 25 days after the monthly statement is issued), you won’t have to pay more than you borrowed. If you carry your balance past that, however, you’ll generally have to pay the regular interest rate - or regular APR - on the amount you owe. Credit cards have higher regular APRs than most consumer loans, so it’s best to avoid carrying a balance.
Outside of interest charges, credit cards may come with fees. Late fees apply to nearly all credit cards when you don’t pay at least the minimum payment by the due date. Annual, monthly, and one-time fees may be charged just to have certain credit cards, too. The credit cards with the biggest benefits and perks - travel credits, free airport lounge memberships, and the highest rewards rates, to name a few - are usually the ones with annual fees.
Key Things to Know About Credit Cards
- Credit cards are rectangular pieces of plastic or metal measuring 3.4 inches by 2.1 inches. They are the same size as a debit card, prepaid card, gift card or driver’s license.
- Credit cards have a magnetic stripe as well as an EMV chip programmed with the information needed to complete a purchase. Some new credit cards also have an RFID chip for contactless payments.
- Making a purchase with a credit card enables the user to securely borrow money as needed and then repay the card’s issuer after the fact.
- Using a credit card responsibly is the easiest way to build a good credit score.
- Other benefits for credit card users include the opportunity to earn rewards on purchases, the flexibility to pay off large purchases over time, or the chance to reduce the cost of existing debt through a balance transfer.
- Banks and credit unions offer credit cards because they are a good source of income from fees and interest charges.
- To qualify for a credit card account, an applicant must be at least 18 years old with enough income to afford monthly bill payments.
- There is no minimum age to get a credit card as an authorized user.
In short, a credit card is one of the most valuable financial tools available to consumers, allowing them to make purchases and pay them back later, all while building a credit history.
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