Credit cards are often difficult to master. Each credit card company has different rules, interest rates, requirements to gain credit, etc. Unfortunately, during our formative years, we aren’t really taught how a credit card works or how to use one responsibly. This simple guide to credit cards will give you the basic information you need on how they work.
What exactly is a credit card?
A credit card, at a base level, is a plastic card. That card connects to a credit account that supplies a credit card user with a set amount (known as the limit) of money they can spend for purchases. For example, a credit account could have a credit limit of $2,000. That means the credit card user has $2,000 of credit to spend on purchases. At the end of a monthly cycle, the credit that was used by the credit card holder will be their balance. If that same credit card holder spent $1,400 of their $2,000 credit limit, their balance would be $1,400. Each credit card company is different in terms of minimum payment required on a monthly balance but, for this example, let’s say the minimum payment is $400. The card holder would have to pay at least that $400 to be considered in good standing with their credit card company. The remaining $1,000 balance would then be subject to an interest rate. This becomes important because, as a balance remains, there is interest charged on that balance. In the long run, a credit card holder could end up paying more than they actually charged on their credit card because of interest rates and fees assessed to their balance.
What are the different types of credit cards?
- Unsecured
An unsecured credit card means that there is no deposit required to secure the line of credit. Each time a card holder uses this type of credit card, the company backing the card is extending credit with no requirement of collateral. These are the most common types of credit cards.
- Secured
Secured credit cards are credit cards that the company backing it requires a deposit to extend credit. This would mean that an applicant, if approved, would have to pay a set deposit (usually around the $250-$500 mark) to obtain credit. This deposit will also serve as the limit for the credit card user. These types of credit cards are best for those with no credit or those who are rebuilding their credit. Over time, if the credit is used responsibly and payments are made on time, a credit card holder may increase their limit by providing an additional deposit.
What’s the best way to pay off a credit card balance?
There are varying opinions on how you should pay your credit balance. The most popular is that you just pay the balance in full every time. This is to avoid the interest fees that accrue on top of your remaining balance.
Through education, you should be able to gain a firm grasp on what a credit card is. Having this foundation of education will help you responsibly use a credit card should you choose to apply for one.
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