A Beginner’s Guide to Credit Cards
Sep 25, 2023
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A credit card is an essential part of the modern-day financial landscape. Whether for online shopping, travel, or even everyday expenses, a credit card is an easy and valuable tool for managing your finances. However, if you're new to the world of credit cards, learning the different terms and types of cards available may seem overwhelming. Here's a beginner's guide to understanding credit cards so you can choose the best credit card for your needs.
What is a credit card?
A credit card is a payment method given by a financial institution, allowing you to borrow money to make purchases that you pay back over time. In simpler terms, it's like taking out a loan every time you swipe your card. However, where a loan provides a lump sum of cash, credit cards provide a line of credit. When you use your credit card to make a purchase, the lender pays the merchant on your behalf. You then have to repay the issuer the amount you borrowed plus interest if you don't pay your balance in full each month.
How do credit cards work?
Each time you spend money using your credit card, the amount is added to your balance. The maximum amount you can borrow is called your credit limit, which is based on factors like credit score, income, and credit history.
You can pay off your balance in full each month to avoid adding interest charges. If you can’t afford to pay your full balance, you can also make minimum payments to keep your account in good standing, but keep in mind that this comes with the added cost of interest.
Different types of credit cards
There are several types of credit cards, each with its own benefits and drawbacks. Here are the most common types:
- Secured credit cards: These are designed for individuals with weak or limited credit histories. They often require a deposit, which acts as collateral and serves as your credit limit. Secured credit cards offer an excellent way to establish or rebuild credit.
- Unsecured credit cards: These cards don't require any collateral and have more flexible credit limits. They are typically available to individuals with a good credit score and credit history.
- Rewards credit cards: These cards offer rewards such as cash back, miles, or points for every purchase. They can be useful tools for people who use them frequently and pay off their bills in full each month.
- Business credit cards: These cards can allow business owners to manage expenses and earn rewards. They often come with higher credit limits and ideal reward categories for businesses to take advantage of.
- Student cards: Student credit cards are designed for college students to build their credit history. They often come with lower credit limits but offer rewards, such as cash back, that can go toward tuition fees.
The bottom line
A credit card can be a valuable tool to build your credit history and manage your finances. However, it’s essential to understand how they work and the different types available to find the one that best suits your needs. By understanding how credit cards work and using them responsibly, you can avoid the pitfalls of high interest rates while enjoying the benefits of convenience and rewards.
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