Credit Cards

The Plastic Jungle: What is a Credit Card?

What Is a Credit Card?

All plastic payment methods — with the admitted exception of gift cards — look virtually the same: name, account number, magnetic stripe and, most recently, that little EMV chip on the left side. But don’t let appearances fool you: credit cards are very different than debit cards and their prepaid counterparts, pretty much every way you slice it.

A credit card, after all, isn’t just a payment method — it’s a loan. Every time you swipe, you’re using part of your pre-approved credit limit (read: the bank’s money) to make that purchase. You’re expected to pay at least part of those purchases back at the end of each month. When you swipe a debit card, on the other hand, you’re using the funds in your checking account (read: your money) to buy stuff, so you won’t owe your bank anything, outside of overdrafts and other checking account fees. As part of this in-depth credit card definition, we’ll dive into what a credit card actually is, the pros and cons associated with having one and the different types of credit cards that are out there in the marketplace, so you can decide which one, if any, is right for you.

What’s a Credit Card?

A credit card is a payment method, yes, but it’s also a revolving credit account. Revolving credit accounts, unlike installment loans, don’t require a fixed payment each month. Instead, account holders are approved for a pre-set credit limit that they can use as they please — so long as they make a minimum payment each billing cycle. Minimum payments on credit cards are typically between 1% to 3% of your total outstanding balance, but the exact stipulation will vary from issuer to issuer. Of course, whatever you don’t pay off by your statement’s due date will begin to accrue interest. Credit cards tout annual percentage rates (APRs) on everything from purchases to balance transfers to cash advances. You also may face a penalty APR on balances if you miss a payment. Credit card APRs can be either variable, meaning they go up or down depending on the U.S. Prime Rate, or fixed, meaning that they don’t. Generally, credit cards have a variable APR, but the specifics will always be marked in the credit card terms and conditions you should read through before you apply.


The Pros & Cons of Credit Cards

For people who use them responsibly, a credit card can be a great spending tool. Since a credit card is a loan, your account will build credit — but unlike installment loans, such as a student loan, auto loan or mortgage, which all involve a fixed monthly payment at a set interest rate over a specified period of time, you can avoid paying interest on a credit card entirely. Plus, many credit cards offer rewards: cardholders can receive points, miles or cash back on their purchases and, even, ancillary benefits, like purchase protection, price protection, extended warranties and certain travel insurance.

Having said that, for people who don’t use them responsibly, a credit card can be a quick way to end up in dire straits. The interest on credit card balances adds up quickly. For example, let’s say you have a $1,000 balance on a card with a 15% APR and you can only make the minimum payment of $20 (2% of the balance) for the entire 118 months it would take you to pay it back that way. You’d wind up paying a whopping $851 in interest by the time that balance is gone, almost doubling what you initially charged.

Plus, credit cards often come with a laundry list of other fees or charges that get imposed when you slip up, among them, penalty APRs, late payment fees, over-the-limit fees and returned payment fees. You’ll also pay fees for certain services, like balance transfers, foreign transactions or even having the card in the first place (known as an annual fee). Here’s a rundown of the pros and cons associated with credit cards.

Pros of Credit Cards

They help you build credit, unlike debit cards or prepaid debit cards, which are not loans and, therefore, don’t get reported to the three major credit reporting agencies.
They provide short-term or long-term liquidity in case of emergencies or beyond.
They feature better built-in fraud protections than debit cards, thanks to differences in federal laws. Credit cardholders can only be held liable for $50 of fraudulent charges and most issuers have zero-liability policies that supercede that. Debit cardholders, conversely, can be held liable for only $50 if they report fraud within two days and up to $500 if they report within 60 days. Beyond that, they could wind up paying all those fraudulent charges.
They’re also safer than carrying around tons of cash.
Many credit cards reward account holders for their purchase in the form of points, miles or cash back.
Many credit cards also feature ancillary benefits, like travel insurance, extra car rental insurance or price protection, that can help consumers save or get out of a jam.
Credit cards issued by major networks, like Visa and MasterCard, are accepted virtually everywhere.

Cons of Credit Cards

You pay interest on charges you don’t pay off in full each month.
That interest can accumulate quickly and land you in serious credit card debt. Credit card debt represents all the purchases you made with the card, plus the interest you owe on them.
Missing payments and running up big balances will do big damage to your credit score — and make it harder to secure other financing in the future.
Credit cards can be terribly convenient, yes, but that makes it a whole lot easier to overspend.
You’ll pay extra fees, too, if you miss payments or go over your limit.
Some credit cards come with annual fees that a person may or may not recoup in rewards. In fact, some starter credit cards carry annual fees since issuers are technically taking a risk on people with thin-to-bad credit, so you’re essentially paying for the opportunity to build or rebuild your score.

How Do I Use a Credit Card Responsibly?

First off, make all of your payments on times, since a missed payment is the quickest way to tank a credit score. Second, aim, at all costs, to pay more than the minimum. When it comes to credit scores, credit cards don’t just affect your payment history; they play a huge role in your credit utilization rate, another major factor of most credit scoring models.

Your credit utilization rate is how much debt you’re carrying versus your total available revolving credit (i.e. your card’s credit limit). It’s generally advised that you keep the amount of debt you owe on each card and collectively below at least 30% and ideally 10% of your total available limit(s), so if you can’t pay those puppies off in full each month, it’s a good idea to, at the very least, try to meet those targets.


How Do I Get a Credit Card?

Credit cards are issued by banks, credit unions and other financial institutions, though there are some exceptions (see: store credit cards). You can get one by filling out a credit card application either online or at bricks-and-mortar branch. When you fill out the application, the issuer will ask for your personal and income information, than they’ll pull a version of your credit report and credit score. Your credit score will be used to determine whether you qualify for a card and, if so, what interest rate you’ll pay. Your income information is generally used to determine what credit limit you’ll be offered.

You don’t need good credit to get a credit card. As we mentioned earlier, there are cards designed specifically with people that have bad or thin credit in mind. But you do need a credit score to qualify for the better products out there and/or the lowest rates or fees. (To see where you stand, you can view two of your credit scores, updated every 14 days, for free on


What Kind of Credit Card Should I Apply for?

That depends on how your credit looks, what you want the card for and how you spend in general. Still, here’s a quick rundown of the major credit card types out there and who they are best suited for:

Secured credit cards: Secured credit cards are entry-level credit. In fact, these cards, by definition, require cardholders to put down a deposit that serves as or “secures” their credit line. They’re designed specifically for people looking to build or rebuild credit — and, as such, can carry higher fees or interest, so those with good credit need not apply.
Student credit cards: Young folks looking to get a starter credit may want to look into student credit cards, which are traditional credit cards in that they don’t require an upfront deposit, but have lower credit limits designed to help newbies keep out of trouble.
Low-interest credit cards: These cards tout lower interest in exchange for no (or very, very few) rewards, so if you’re prone to carrying a balance or you need a card to make an emergency purchase, this is your guy.
Balance-transfer credit cards: Balance-transfer credit cards offer a low-to-no introductory APR for a certain period of time when you transfer a balance over from another credit card. (Note: you generally pay a fee to do so.) They’re targeted towards folks carrying high-interest credit card debt who are looking for an opportunity to pay it down without accruing interest.
Rewards credit cards: The apex of credit cards in that they offer points, miles, cash back and other perks to people with good credit. But folks who carry a balance may want to think twice about applying for a rewards credit card, since they also tend to carry annual fees and higher APRs.
Remember, every credit card application you fill out can generate a hard inquiry on your credit report, and too many of those can damage your credit score or make you look risky in the eyes of a lender. That’s why it’s important to research credit cards ahead of time to determine what plastic may the best piece for you in addition to whether you credit score can qualify for it. While reading the fine print, be sure to note, among other things:

Whether a card carries an annual fee
What its purchase APR range is
What its balance-transfer APR range is
If the issuer is offering promotional financing on purchases and/or balance transfers
What its penalty APR is and when it will get imposed
What late payment fee it carries
Whether the issuer reports to the credit bureaus
The terms and conditions of its rewards program, if applicable
Your issuer’s privacy policy
Whether any disputes you file are subject to mandatory arbitration — meaning you agree not to bring your case to court, but rather to have it settled by a third-party arbitrator of the issuer’s choosing — and whether is this a way to opt out of the clause.
Happy credit card shopping!