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What is a 'Credit Card'

A credit card is a card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made, and borrowing limits are pre-set according to the individual's credit rating.

BREAKING DOWN 'Credit Card'

Credit cards have higher interest rates – about 19% per year in 2016 – than most consumer loans or lines of credit. Almost every store allows for payment of goods and services through credit cards. Because of their widespread acceptance, credit cards are one of the most popular forms of payment for consumer goods and services in the United States.

Major Credit Cards

Major credit cards are usually issued through banks or credit unions. They bear the Visa, MasterCard, Discover or American Express logo. Some carry incentives that distinguish the cards and place them in categories. For example, a reward card is a type of major credit card that offers attractive incentives for consumers. Reward cards give cardholders airline miles, points toward hotel nights at specific chains, or other perks. Some reward cards also provide cash back on purchases.

Zero-interest cards can be a smart way to pay off existing debt on cards with high interest rates. However, the interest rate often goes up after a few months, so the consumer should carefully review the disclosure of terms. Student credit cards represent a higher risk for the issuer, so they usually come with relatively low limits and fairly steep interest rates. When used wisely, however, student credit cards can give young people with limited credit histories a chance to build a successful record of payment. Over time, this increases the student's credit score and enables him to receive consumer credit with better terms in the future.

Store Credit Cards

Store credit cards are intended to promote customer loyalty. Approval for store cards may be easier to obtain than major credit cards. However, many store cards can only be used for purchases from the retailer that issued the card. As incentives, retailers often offer their cardholders special discounts or advance notice of promotions or sales.

Secured Cards

For consumers with damaged credit, a secured card can provide a way to make online purchases and eliminate the need to carry cash. These cards usually require the applicant to put up a deposit of a few hundred dollars. The amount of the deposit may serve as the initial credit limit. If the cardholder uses the card responsibly, he might be able to upgrade to a regular credit card in the future. Most secured cards report payments and purchase activity to the major credit agencies, which can help the cardholder rebuild his credit.

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