What is a Credit Card?

From your junk mail to TV advertisements to visiting the store, it’s hard NOT to run into a credit card opportunity. So, since we encounter them so frequently, let’s dive deeper: what is a credit card?

What is it?

Similar to a debit card, a credit card is issued by a financial institution for you to swipe away on purchases. The catch is you are not technically pulling from one of your checking or savings accounts. Instead, you’re pulling from your own personal “loan” that the financial institution has issued a lump sum amount for you to use whenever you need it.

Whenever you choose to borrow from the credit limit that is established by the financial institution, you need to pay down what you have borrowed so you can borrow again, or, to avoid interest charges, by paying everything you borrowed at each statement.

When considering a credit card, ask yourself these questions:

• What is the interest rate? – A lower rate is always in your best interest when it comes to borrowing sums of money.
• Is there an annual fee? – You should be aware of any fees attached to your credit card because these are extra amounts you’ll need to pay.
• What is the late payment penalty? – Not only will a late payment affect your credit score, but some credit cards also have penalty fees need to pay as well. We understand it happens, but it’s definitely best to pay at least the minimum.
• What is the spending limit? – If you are approved for a credit card, you will be allowed a lump sum limit. It’s best to not go over this limit.
• Does this card accumulate points? – Points are incentives to use the card. It’s the credit card company’s “loyalty program” to encourage you to make purchases, then you’re often rewarded with cash back, miles, etc.

Why?

Credit cards are a great way to build credit, especially if you plan to pay off what you borrow each month. In addition, it’s nice to choose a credit card that rewards your spending through a point system. This could lead to cash back on your purchases. A credit card is also just nice to have in case of emergencies. Things pop up and it might be easier to put the amount on a credit card this month until you have the money to pay it off next month. All these reasons are why a credit card isn’t such a bad idea.

But a credit card also can be an easy way to ruin your credit score if you put too much on the card and miss payments. Plus, some credit card companies are predatory and hide things in the fine print that could put you in a worse financial position. Evaluate and be honest with yourself if you can handle the responsibility of a credit card before you get one.

How can I get one?

If you choose to get a credit card, choose one that suits you. There are two types to research before you apply. Traditional credit cards are offered through your financial institution, or a retail credit card offered by retail stores you visit. Learn about their differences before committing to one.