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What is a Credit Card?

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What is a Credit Card?A credit card is a thin plastic card issued by a bank or other financial institution that authorizes the holder to purchase goods or services on credit up to a predetermined credit limit.

When a consumer makes a purchase using a credit card, the bank credits the account of the merchant.  The bank then bills the cardholder at the end of the billing period.  The consumer can choose to pay the bank back in full within the allotted grace period or in monthly instalments with interest.

Credit cards are almost universally accepted and have become one of the most popular forms of payment.  Credit cards may even be required in order to purchase some products or services.  For example, in certain cases, it may be difficult to rent a car or book a flight without making a credit card payment.

Terms of a Credit Card

The terms of a credit card are determined by the credit card provider.  The bank determines the rewards, applicable fees, and interest rate that will apply to each credit card.

Additionally, each credit card user is generally assigned a credit limit.  This is the maximum amount the card holder will be able to purchase on credit using the card and is generally determined by the consumer’s credit rating and other applicable factors.  Your credit limit will likely increase as you manage your credit responsibly over time.

Credit Card Rewards

Many banks offer rewards to cardholders as an incentive to use their credit card.  Rewards may include airline miles, cash back, and other attractive perks that you generally don’t receive when making a purchase using cash, a debit card, or a check.

Applying for a Credit Card

A consumer may apply for any credit card he or she wishes.  Banks generally look at an applicant’s credit history and other relevant information in order to determine whether to issue the applicant a credit card or not.

Credit Card Statements

Credit card companies also issue monthly statements, which makes it easy to budget and track your spending.  Your credit card statement will normally show the following:

  • Your current balance
  • The details of any purchases charged on the card and any payments made
  • When your next payment is due and the minimum payment you must make.

Review your monthly statements to ensure that you were not overcharged on any purchases, no fraudulent purchases have been made, any interest or penalties assessed are correct, and any payments you have made have been properly credited to your account.

Credit Card Tips

When used responsibly, I consider credit cards to be very valuable personal finance tools.  I personally use credit cards for almost every purchase I make since I like earning free rewards, they are safer to use and carry around than cash, and I like the convenience.

In order to get the most out of your credit cards, consider doing the following if appropriate for your personal circumstances:

  • Pay off your credit card in full each month (not just the minimum payment) to avoid being assessed any interest or penalties.  If this is not possible, try and make at least the minimum payment.
  • Set up automatic payments on all credit cards to ensure you never miss a payment.  Make sure you have sufficient funds in your bank account to make these payments.
  • Find a credit card that is appropriate for you given your personal situation.  For example, if you carry a balance, you may want to opt for a card with a 0% APR introductory period or that charges a low interest rate.  If you don’t carry a balance, you may want to consider obtaining a credit card that offers the best rewards.
  • Monitor your credit card statements for unauthorized charges.  If you discover any, alert your credit card company immediately.

What are your thoughts about credit cards?  How have you used credit cards to your advantage?  Leave a comment below!

Image: Bigstock/Volff

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