So you’ve decided you’re ready to be an adult and take on the world, starting with your first credit card. Congrats! But have you stopped and asked yourself what a credit card is? You might think a credit card is simply a piece of plastic you can use to buy things, but it’s much more. A credit card is a financial tool that can help you build your credit history, leading you to a financially stable future.
Keep reading to learn more about what credit cards are, how to use them, and the types of credit cards you can find.
Credit card definition
A credit card is a small plastic or metal card issued by a financial institution, such as a bank or credit union, that allows you to borrow money to pay for goods or services. In other words, when you use a credit card, you’re borrowing money from the issuer and promising to pay it back later, usually with interest and fees.
Credit cards help you get a quick loan for a maximum amount set by your credit limit. When you apply for a card, the issuer will look at your credit history to see if you’re a reliable borrower and pre-approve you for that credit limit.
Once pre-approved, you can use your available credit to pay for almost anything, from your small, everyday purchases like groceries, gas, and favorite streaming services, to bigger purchases like the latest iPhone, a big TV, or even a car.
Best ways to use a credit card
Now that you know what a credit card is, it’s time to learn how credit cards work. Here are a few best practices for using a credit card without getting yourself into trouble:
- Avoid carrying a balance from one month to the next: The best way to use a credit card is to pay your balance in full and on time every month. That way, you’ll avoid paying interest on your purchases, which can add up quickly and make it difficult to get out of debt.
- Keep track of your spending: Part of responsible credit card use is not spending more money than you can afford to pay back. Before using your credit card, look closely at your budget and figure out how much you can realistically afford to spend each month.
- Don’t max out your credit limit: Even if your credit card issuer assigns you a credit limit of $10,000, that doesn’t mean spending the total amount every month is a good idea, even if you can afford it. Try to keep your balance below 30% of your credit limit.
- Take full advantage of all the perks and rewards: One of the best things about using a credit card is all the perks and rewards you can get just for using it. Some cards come with cash back, points, or miles you can earn on every purchase, while others offer sign-up bonuses and special discounts at select retailers.
Types of credit cards
There are many different types of credit cards, each with its unique advantages and drawbacks. Here are a few of the most popular types of cards that may fit your particular financial situation.
A rewards card is a credit card that will give you something back every time you use it. With this type of card, you can earn cash back, points, or miles on every purchase, depending on your specific card.
Cash back credit cards
As the name suggests, these cards will give you a certain percentage of cash back on every purchase. These can be:
- Flat-rate cash back cards, which give you the same percentage back on all purchases.
- Bonus category cash back cards, which give you a higher cash back rate on specific purchase categories.
Travel rewards credit cards
This type of card rewards you with points or miles on travel-related and other purchases. You can use those points or miles to pay for flights, hotels, rental cars, and other travel expenses. Some examples of travel rewards cards include:
- Airline credit cards, which are co-branded with a particular airline and usually come with perks like free checked bags, priority boarding, and in-flight discounts when flying on that carrier or its partners.
- Hotel credit cards, which are co-branded with a particular hotel chain and offer perks like free nights, room upgrades, and late checkouts.
- Generic travel rewards cards, which don’t have any airline or hotel affiliation but come with perks like travel insurance, lounge access, and concierge services.
Retail rewards cards
Retail rewards cards are co-branded cards that retailers offer with perks like discounts, free shipping, and exclusive sales.
Credit cards for credit building or bad credit
If you don’t have a credit history or if you have bad credit, you’ll need to choose one of the following types of credit cards:
Secured credit cards
With a secured credit card, you need to put down a deposit – usually equal to your credit limit – before you can use the card. This deposit acts as collateral in case you can’t make your payments, so it’s like getting a loan from yourself.
The good thing is that, even though it’s not technically a loan, all your transactions affect your credit history, so you can use these cards to start building your credit from the ground up.
Apply for a Chime Credit Builder Secured Visa® Credit Card to start building credit with everyday purchases and on-time payments.¹
Prepaid credit cards
These are similar to secured cards in that you load money onto the card in advance, but they don’t show up in your credit history.
Cards for specific cardholders
Some cards are designed for a particular type of user:
Student credit cards
These cards cater to students. They come with lower credit limits and APRs than other cards; some offer rewards or cash back on school books and supplies.
Business credit cards
Business cards are designed for business expenses and often come with special rewards, such as cash back on office supplies or gas. They also tend to have higher credit limits than personal cards.
Other types of credit cards
Balance transfer credit cards
Balance transfer credit cards offer a 0% APR introductory period on balance transfers. One way you could use a balance transfer credit card is to transfer your debt from other high-interest credit cards and pay it little by little without paying interest for the introductory period.
Low APR credit cards
These cards come with a low APR – usually below 20%. You’ll save on interest if you carry a balance from month to month.
Credit card terms to know
You don’t need to be a financial whiz to get comfortable with these credit card-related terms:
Credit card interest or annual percentage rate (APR)
Interest is what you pay for borrowing money on your credit card. It’s expressed as an annual rate, but you’re charged interest daily based on your outstanding balance.
Credit card balance
This is the total amount of money you owe on your credit card at any given time.
Your credit score is a number that represents your creditworthiness. It’s based on your credit history and helps lenders decide whether or not to give you a loan and determine your credit limit. Credit scores range from 300 to 850, with an average credit score being around 700-720.
This is the maximum amount you can spend on your credit card.
Credit card annual fees
Depending on the type of credit card you own, some banks or credit card issuers will charge you a fee every year. In most cases, these fees don’t represent a heavy blow to your finances, running from $20 to $50 per year. But in other cases, they can be as high as $500 or more.
Some cards don’t come with an annual fee, and you can get as many as you want (although having too many credit cards is not a good idea). These no-fee credit cards don’t usually offer perks (although some do).
Why do banks charge annual fees on their credit cards?
Fees are how the bank offsets the cost of offering cardholders rewards, perks, and other benefits. While they sometimes seem expensive, these benefits pay for the fees several times over if you use your credit card wisely.
Credit card companies know that most people don’t use all the perks that come with their cards. This leaves money on the table that the issuer uses to pay for active cardholders’ perks.
How much does it cost to own a credit card?
The cost of owning a credit card depends on the type of card you have. Some cards, like rewards cards, come with annual fees that can go from as little as $20 to $500 or more. Others have no annual fee and are free to own and use.
What should I use my credit card for?
You can use your credit card for anything from buying gas to paying rent. However, you should only use it for things you can afford. Additionally, if you’re using a rewards card, you should try to use it only on the spending categories that give you the most rewards.
What is the purpose of a credit card?
The purpose of a credit card is to give you a fast and practical way to borrow money to pay for purchases. Credit cards also come with many other benefits, like rewards and perks.
What is a cash advance of a credit card?
A cash advance is a feature of some credit cards that allows you to withdraw cash at an ATM from your credit limit.
What is cash back on a credit card?
Cash back is a type of rewards program that gives you a percentage of your purchase back in cash.
What's the difference between a credit card and a debit card?
Debit and credit cards are very different tools. A debit card is linked to your checking or savings account. You use debit cards to withdraw cash or make purchases with those funds.
In contrast, a credit card delivers a line of credit you use to pay with your bank’s money. Many people choose credit cards over debit cards for their convenience and perks.
What are the major credit card networks?
There are four major credit card networks worldwide: Visa, Mastercard, Discover, and American Express.
Thinking about getting a credit card?
Credit cards are financial instruments that make it easy to borrow money for purchases and everyday expenses. They’re practical, easy to use, and can be a powerful means to make or break your credit history.
Credit cards can help you build your credit history and improve your financial standing when you use them wisely. But when used irresponsibly, they can lead to debt and financial problems.
The best way to use a credit card is to avoid overspending or maxing out your balance and to pay your balance in full and on time every month. These practices will help you avoid interest charges, late fees, and damage to your credit score.
There are dozens of different types of credit cards to choose from, and you’re sure to find the right one for you. But before you take your pick, learn more about how credit cards work.