Credit Card
Definition
A credit card is a plastic or metal card issued by a bank or financial institution that allows the holder to borrow funds to pay for goods and services with the promise to repay the borrowed amount along with any agreed-upon fees or interest.
Detailed Explanation
A credit card represents a revolving line of credit from a financial institution that enables cardholders to make purchases or withdraw cash up to a certain limit, known as the credit limit. When a person uses a credit card, they are essentially borrowing money from the card issuer to be repaid later, either in full by the billing date to avoid interest charges or over time with interest.
Credit cards offer convenience, flexibility, and the ability to make purchases without carrying cash. They also provide benefits such as rewards, cash back, travel points, and protections against fraud and purchase disputes. Responsible use of a credit card, including timely payments and maintaining a low credit utilization ratio, can help build and improve one's credit score.
However, high balances and late payments can negatively affect credit health. Credit card terms, including interest rates and fees, vary widely between issuers and should be carefully reviewed before you obtain a card.
Example
Alice uses her credit card to buy a new laptop for $1,000. She receives 1% cash back on the purchase, adding $10 to her rewards balance. She plans to pay off the balance within the 30-day grace period to avoid interest charges.
Key Articles Related To Credit Cards
Related Terms
Annual Fee: A yearly charge by the credit card issuer for the convenience of the credit card.
Credit Limit: The maximum amount of credit a financial institution extends to a client on a credit card.
Interest Rate (APR): The annual rate charged for borrowing or earned through an investment, which in the context of credit cards, applies to balances carried beyond the grace period.
Minimum Payment: The lowest amount of money that one is required to pay on their credit card statement each month to avoid penalties.
FAQs
What happens if I only make the minimum payment on my credit card?
Making only the minimum payment extends the repayment period and increases the total interest paid on the outstanding balance.
How can I avoid paying interest on a credit card?
To avoid interest, pay the full balance on your credit card before the due date each month.
Can a credit card improve my credit score?
Yes, responsible use of a credit card, such as making payments on time and keeping balances low, can help improve your credit score.
Editor: Colin Graves