Loading the player...

What is a 'Credit Card'

A credit card is a card issued by a financial company which enables the cardholder to borrow funds. The funds may be used as payment for goods and services. Issuance of credit cards has the condition that the cardholder will pay back the original, borrowed amount plus any additional agreed-upon charges. The credit company provider may also grant a line of credit (LOC) to the cardholder which allows the holder to borrow money in the form of a cash advance.  The issuer pre-sets borrowing limits which have a basis on the individual's credit rating.


Credit cards have higher annual percentage rates (APRs) than other forms of consumer loans and lines of credit. Interest charges on the unpaid amount charged to the card usually begin one month after making a purchase. They remain one of the most popular forms of payment for consumer goods and services, and nearly every business allows for payment of products and services through credit cards.

Most Common Types of Credit Cards

Banks, credit unions, or other financial institutions issue most major credit cards. The major affiliated companies include Visa, MasterCard, Discover, and American Express. Many credit cards carry incentives which distinguish the cards from one another and make them more attractive to consumers. Many have rewards geared towards specific interests such as airline miles, hotel rooms, gift certificates to major retailers, and cash back.

A store may also issue a branded version of the major credit cards. These store-branded cards are specifically intended to promote customer loyalty. Often it is easier to qualify for a store credit card than for a major credit card. However, many store cards limit usage to purchases from the issuing retailer. Also, retailers may offer cardholders special discounts, notice of promotions, or special sales.

Secured credit cards are a kind of credit card, where the cardholder secures the card with a security deposit. These cards usually have a limited line of credit and may charge an annual membership fee. The required deposit is most often equal to the total line of credit. Frequently, those with limited or poor credit history will use secured credit cards. After repeated, responsible use, the issuer will refund the security deposit. These cards may also be known as prepaid credit cards and semi-secured credit cards.

Similar to a secured credit card, a prepaid debit card is a type of secured payment card. However, the funds available are only those which you or someone else has deposited into the account or the funds in the linked bank account.

In contrast, an unsecured credit card will not require a security deposit or collateral. These cards will have higher lines of credit offerings and offer lower interest rates on unpaid balances. The unsecured card is the most common type of credit card in the world. 

Building Credit History with Secured Credit Cards

For consumers with damaged credit, a secured card can help the cardholder rebuild his or her credit while providing a way to make online purchases and eliminate the need to carry cash. Most secured cards report payments and purchase activity to the major credit agencies. If the cardholder uses the card responsibly, they might be able to extend their line of credit or upgrade to a regular credit card in the future.

While financial institutions want to protect themselves from potentially having to write off bad debt from cardholders with higher credit risks, they also recognize that higher risk individuals may one day turn into less risky individuals. Extending credit may thus allow the financial institution to create more business, as well as earn interest on the credit that a semi-secured cardholder borrows against.

  1. Secured Credit Card

    A secured credit card is a type of credit card that is backed ...
  2. Purchase Rate

    The purchase rate is the interest rate applied to purchases made ...
  3. Credit Card Debt

    Credit card debt is a type of unsecured liability which is incurred ...
  4. Universal Default

    Universal default allows a credit card company to raise a card’s ...
  5. Balance Protection

    Balance protection is a type of optional coverage offered on ...
  6. Stored-Value Card

    A stored value card is a type of electronic bank debit card.
Related Articles
  1. Personal Finance

    3 New Types Of Credit Cards To Look For

    These three types of credit cards are becoming popular with customers looking to pay less fees and build up their credit scores.
  2. Investing

    Investing in Credit Card Companies

    Find out why investing in credit card companies requires keeping an eye on consumer indexes and the overall health of the economy.
  3. Small Business

    How to Use Small Business Credit Cards

    A small business credit card can be a convenient way to increase your company's purchasing power, enabling access to a revolving line of credit.
  4. Personal Finance

    Credit Card or Cash: Which To Use?

    Credit cards are more convenient to use than cash, but they're not always the best choice. Here is why you should and shouldn't pay with a credit card.
  5. Personal Finance

    Credit, Debit and Charge: Sizing Up the Cards in Your Wallet

    Not all plastic is equal! Learn the difference among the three kinds, and how each can affect your finances.
  6. Personal Finance

    Why More Millennials Need Credit Cards

    Here's why more Millennials should have credit cards – even though a majority don’t.
  7. Personal Finance

    What Happens When Your Credit Card Expires?

    Find out why credit cards have expiration dates, and why updating your credit card once in a while is a good idea.
  1. What is the difference between a prepaid credit card and a gift card?

    Although prepaid and gift cards are used in the same manner, a prepaid credit card can be used repeatedly, while a gift card ... Read Answer >>
Trading Center