What Is a Credit Card?
A credit card is a thin rectangular slab of plastic or metal issued by a financial company, that lets cardholders borrow funds with which to pay for goods and services. Credit cards impose the condition that cardholders pay back the borrowed money, plus interest, as well as any additional agreed-upon charges. An example of a credit card is the Chase Sapphire Reserve credit card which you can read our review of to get a good sense of all the various attributes of a credit card.
The credit company provider may also grant a line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances. Issuers customarily pre-set borrowing limits, based on an individual's credit rating. A vast majority of businesses let the customer make purchases with credit cards, which remain one of today's most popular payment methodologies for buying consumer goods and services.
Understanding Credit Cards
Credit cards feature higher annual percentage rates (APRs) than other forms of consumer loans. Interest charges on the unpaid balance charged to the card are typically imposed one month after a purchase is made.
By law, credit card issuers must offer a grace period of at least 21 days before interest on purchases can begin to accrue. That's why paying off balances before the grace period expires is a good practice when possible. It is also important to understand whether your issuer accrues interest daily or monthly, as the former translates into higher interest charges for as long as the balance is not paid. This is especially important to know if you're looking to move your balance to a better card with a lower interest rate. Mistakenly switching from a monthly accrual card to a daily one may nullify the savings from a lower rate.
Individuals with poor credit histories often seek secured credit cards, which require cash deposits, that afford them commensurate lines of credit.
Types of Credit Cards
Most major credit cards, which include Visa, MasterCard, Discover, and American Express, are issued by banks, credit unions, or other financial institutions. Many credit cards attract customers by offering incentives such as airline miles, hotel room rentals, gift certificates to major retailers and cash back on purchases. These types of credit cards are generally referred to as rewards credit cards.
To generate customer loyalty, many retail establishments issue branded versions of major credit cards, with the store's name emblazoned on the face of the cards. Although it's typically easier for consumers to qualify for a store credit card than for a major credit card, store cards may only be used to make purchases from the issuing retailers, which may offer cardholders perks such as special discounts, promotional notices, or special sales.
Secured credit cards are a type of credit card where the cardholder secures the card with a security deposit. Such cards offer limited lines of credit that are equal in value to the security deposits, which are refunded after cardholders demonstrate repeated and responsible card usage. Also known as "prepaid" and "semi-secured" credit cards, these cards are frequently sought by individuals with poor credit histories.
Similar to a secured credit card, a prepaid debit card is a type of secured payment card, where the available funds match the money someone already has parked in a linked bank account. By contrast, unsecured credit cards do not require security deposits or collateral. These cards tend to offer higher lines of credit and lower interest rates on unpaid balances.
Building Credit History with Secured Credit Cards
Secured cards can help consumers rebuilt damaged credit while providing a way to make online purchases and eliminate the need to carry cash. But since secured cards report payments and purchasing activity to the major credit agencies, cardholders who use their card responsibly may be able to extend their lines of credit or upgrade to regular credit cards.