Credit Card

Credit card summary:

• A credit card gives you spending flexibility, and could help you build and maintain good credit. 

• Creditors offer credit cards to earn money, primarily through interest and fees.

• Most credit cards are unsecured, which means you qualify based on your credit standing and financial situation.

Credit Card Definition and Meaning

A credit card is a payment card that lets you buy things now and pay for them later. It’s a pre-approved loan that lets you borrow, repay, and borrow more, as often as you like, up to your credit limit. Unlike a typical loan, credit cards often have perks.

Key Attributes of a Credit Card

Debt, interest, and spending are key to understanding the humble credit card.

• Debt: Credit cards let you spend on credit, a form of debt. The greater your credit card balance, the greater your debt.

• Interest: Credit cards typically charge you interest on unpaid balances. You can avoid interest by paying your entire balance in full by the due date.

• Spending: Credit cards make spending easier. You can buy things now and pay for them later. This is both an advantage and a disadvantage.

Lenders, spenders, and merchants are involved in using credit cards.

Lenders, those who offer credit cards, are usually banks and credit unions. They earn income from spenders who pay interest and late fees, as well as from merchants who pay fees for each transaction.

Spenders are people who use their credit cards for payment. If you use a credit card, you are borrowing money now, and the expectation is that you will pay it back later. Credit cards are more flexible than debit cards because the latter only allow you to spend the money that’s in your bank account. Some credit cards earn rewards like travel points or cash back. 

Merchants are sellers who let spenders buy things on credit. Merchants benefit from letting spenders swipe credit cards—the more kinds of payment the merchant accepts, the more business they earn. People also tend to spend more with credit cards than they would with cash.

Read more: How Do Credit Cards Work

Types of Credit Cards

Secured and unsecured credit cards are the two main credit card types.

Secured credit cards require a cash deposit. Your spending limit is usually equal to the amount of your deposit (but could be higher). You don’t spend against your deposit. You use the card like any other credit card, and pay the bill when it comes. If you use the card, you’re required to make at least a minimum payment each month. Your deposit isn’t applied to your purchases. It’s held in case you don’t repay your debt. 

After six to 12 months of responsible use, you can apply for a traditional credit card and ask for your deposit back. Some lenders convert your account and return your deposit automatically.

Unsecured credit cards do not require a deposit. You qualify based on your credit score, income, and other factors.

A poor or nonexistent credit score can hurt your approval chances for an unsecured card. That’s why new borrowers with little or zero credit history often start out with secured credit cards.

Credit cards can be further broken down by spending category, which could help you decide which credit card could be most valuable to you.