Credit Card

Credit card summary:

• Credit cards are plastic or metal cards that cardholders can use to borrow cash or pay for items using credit, often with perks like cash back or reward miles.

• Credit card balances almost always incur interest charges. 

• When you use a credit card, you can choose to pay off your entire balance each month. Or you can make a partial payment, also called carrying a balance.

Credit card definition and meaning

Credit cards are physical proof that consumers have a line of credit allowing them to finance purchases or access a cash advance. The actual credit card could be made of plastic or metal, and you don’t necessarily need to have it in your hand to use it. The card works the same way whether you swipe at the register at your coffee shop, enter the number manually when you check out online, or tap your phone to use a card that’s stored in your digital wallet. 

A credit card lets merchants know that they can advance goods and services to you without an exchange of cash. They’ll be paid by the financial institution that issued the card. You, in turn, are responsible for paying the issuer.

Key concept: A credit card is a plastic or metal card attached to a line of credit with a preset limit. 

More about credit cards

A credit card allows you to conveniently access a line of credit up to a preset limit. They're a way to borrow on the fly with flexibility and safety. You could use your credit card to purchase goods and services or take cash advances without applying for new loans every time. If lost or stolen, your credit card can be replaced, and in most cases, you’re not responsible for unauthorized charges.

On average, credit card debt has a higher interest rate compared to mortgages and car loans. That’s because most credit cards are unsecured, which means that you qualify based on your creditworthiness. There's no collateral the issuer could take if you fail to repay your balance. Also, credit cards are more subject to fraudulent use than other types of credit, and issuers have to absorb that cost. 

Credit cards: a comprehensive breakdown

Credit card issuers make money from cards in several ways: 

• Fees for annual membership and late payments, and services like foreign transactions and cash advances

• Interest on balances carried from month to month

• Processing fees charged to merchants that accept credit card payments

Credit card issuers work hard to encourage you to use your card. They may offer merchandise, cash back, airline benefits, extended warranties, or other rewards and perks. Some advertise lower interest rates or no annual fees. It's important to evaluate how you plan to use a card and which type of card will serve you best. 

Popular types of credit cards

Each of the cards below comes with a set of advantages and drawbacks that could make it a good choice for someone.

Rewards credit cards

Rewards credit cards give you merchandise, cash back, travel, or other perks in exchange for using the card. The downside of rewards cards for people who carry balances is that their interest rates tend to be high. Premium rewards cards often charge an annual fee. 

Low interest credit cards

If you sometimes carry a balance, you might be better off with a card that offers lower interest rates. Low APR cards usually require excellent credit to qualify.

Business credit cards

Business credit cards operate a lot like personal credit cards, but they often have higher credit limits, enhanced record-keeping for tax purposes, and rewards generally geared to business users.  

Secured credit cards

Secured credit cards help people who need to establish or reestablish credit. To get one, you have to send in a cash deposit. A secured card could be a good option if you don't qualify for a traditional card. Many secured cards come with a long list of fees, but some don’t. It’s definitely worth your time to compare several cards before choosing one.

Balance transfer cards

Balance transfer credit cards allow you to refinance higher-interest debt and save on interest while paying it down. These cards typically come with an introductory zero percent or low-interest period, typically ranging from 12 to about 21 months. After that, whatever balance you still have on the card is charged the regular interest rate. Most balance transfer cards charge a 3% to 5% fee for each balance that you transfer.