A credit card is a payment method that lets the user borrow money as needed to purchase goods and services. Using a credit card responsibly also 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. On the other hand, 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, in light of the individual’s existing financial obligations. There is no minimum age to get a credit card as an authorized user, however.
Physically, a credit card is about the size of a driver’s license. Most new credit cards are now equipped with a magnetic stripe and a metal chip, allowing cardholders to swipe, dip or tap their card in or against a payment terminal to complete a purchase. The stripe, the chip, or the credit card number can be used to make purchases, which will deduct from the card’s credit line. The amount of a credit line – called a credit limit – depends on the cardholder’s income and overall creditworthiness. Once a month, the cardholder receives a credit card statement detailing purchases and payments made during that billing cycle, and noting when the cardholder must make a payment on the account.
Credit Card Features & Fees
Credit cards require regular payments to keep the account open and in good standing. 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. 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.
Credit cards may give access to a certain amount of cash in the form of a cash advance. When you take out a cash advance, the grace period does not apply. You will start accruing interest the day you get the cash, and the cash advance fee will be added to your credit card balance.
A balance transfer is another credit card function that usually comes with a fee. Balance transfers essentially pay one credit card balance with another credit card for the purpose of saving money in interest charges. In addition to the average balance transfer fee of 3%-5%, there’s an interest rate for the amount you transfer.
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