Credit Card Basics

A credit card is a plastic card that provides you access to a credit line that is offered by the financial institution who issued the card. When you use a credit card, you borrow money from the issuer to pay for the purchase. You then are responsible for paying those funds back to the card issuer.

When you get a credit card, it is attached to a line of credit. The issuing financial institution will cap that line of credit at a certain amount. This is known as your credit limit. Factors such as credit score, income, and other debts will determine what limit you qualify for.

When you swipe your credit card at a merchant, the payment networks, like VISA, make sure that the merchant gets their money and that you get billed correctly for the purchase. At the end of each month, you get a bill that you can pay either the minimum payment amount, full amount owed, or an amount somewhere in between. Paying off your credit card in full each month is the best way to save money, as you will pay less interest with the line being at a zero balance. Monthly, credit card payments are reported to the three credit bureaus and added to your credit reports.

- Rewards Credit Cards
A rewards credit card is a credit card that offers rewards. These rewards normally accumulate in the form of points, which you can redeem for a variety of items, such as: cash back, travel, or gift cards. Cash back offers you a percentage of your purchases back in cash. You can redeem these funds to help pay your bill or deposit into your account. Travel cards allow you to earn miles or points to a specific company's loyalty program. When looking into a rewards card, you should consider the different types of rewards, and which one would best suit your wants and needs.

- Secured Credit Cards
Secured credit cards are typically obtained by those who are just starting to build credit or for those who have had some credit mishaps in the past. These cards require you to offer up a security deposit to the issuing financial institution. The credit limit will match the amount of your security deposit. You do still have to make monthly payments on a secured credit card to not hurt your credit.

- Student Credit Cards
Student credit cards are a good option for students to establish and begin building their credit while they're in school. Typically these cards start with a low credit limit, and at times can be easier to get than other types of credit cards, as lenders know that students tend to have limited credit history.

- Store Credit Cards
There are some retailers that offer their own store credit cards. Some of these cards can be used anywhere that accepts the network they are attached to, such as VISA or Mastercard. Other store cards can only be used at that specific retailer, or can give you special benefits, like extra discounts.

- Annual Percentage Rate (APR)
The APR is the interest charged on a credit card that is expressed in an annualized amount. You can always find your APR in the credit card agreement and on your monthly billing statements.

- Authorized User
An authorized user is a person on a credit card account that can make purchases and obtain account information, but they are not responsible for making any of the payments. The primary account holder can choose to add or remove authorized users from an account at any time. An authorized user's credit is impacted by the credit card they are added onto.

- Available Credit
The available credit is how much of your credit line you have that is being unused. Available credit can be found by subtracting your outstanding balance by your credit limit.

- Balance Transfer
A balance transfer is a transfer that moves all or part of the balance you owe on one credit card to another credit card. This is typically done for a lower interest rate or to give yourself one single monthly payment. Some financial institutions will charge a balance transfer fee of some sort. Make sure to read all material you are given and look for institutions that offer free balance transfers.

- Billing Cycle
The period of time between credit card statement closing dates. This is typically a one-month time period. At the end of a billing cycle, the card issuer will calculate your new statement balance based on transactions from the most recent billing cycle and your previous billing cycle.

- Cardholder
A person who possesses a credit card or debit card.

- Cash Advance
A cash advance is a cash withdrawal from your credit card. Cash advances are typically accompanied by either a fee or their own APR, and normally have a smaller advance limit than a credit card point of sale limit.

- Charge-Off
A charge-off is an accounting term for when a lender declares a loan to be a loss to their institution. Charge-offs are a derogatory entry on your credit report and can severely impact your credit score.

- Credit Bureau
A credit bureau collects information regarding the credit history of borrowers in order to generate a credit report and credit score. The credit bureaus make these credit reports and scores available to credit card companies, financial institutions, etc. for use of determining creditworthiness.

- Credit Limit
A credit limit is the maximum amount that you are allowed to charge to your credit card. Various factors determine what your credit limit will be, including payment history, credit utilization, and gross monthly income.

- Credit Utilization Ratio
Your credit utilization ratio, also known as capacity, is the amount of your current credit card balances divided by the total amount you have available to you to use. If you have a total credit card balance of $500 and you have a total credit limit of $1,000 you have a credit utilization ratio of 50%. Credit Utilization makes up roughly 30% of your credit score, as a general rule of thumb, it is best practice to keep your credit utilization ratio at or below 30%.

- Interest Rate
The interest rate, in its simplest definition, is the percentage a lender charges to a borrower on the money that is being borrowed. Essentially, it is the price you pay to borrow funds.

- Minimum Payment
A minimum payment is the lowest monthly amount that a credit card issuer will accept towards your credit card balance.

- Outstanding Balance
Your outstanding balance is the unpaid amount that you owe on your credit card.

- Over-Limit
Being over-limit means that the cardholder has gone over the credit limit that was approved for them. Going over-limit can come with some rather hefty fees. Most lenders will attempt to deny transactions that would put a borrower over their limit, however, in some instances, transactions are still approved. It is never a good idea to go over your approved limit.

- Pending Transaction
A pending transaction is a transaction that has not yet been fully processed in the system. This means that the funds are on hold but have not charged the card yet or updated your available balance. A pending transaction can stay in the pending state for a few days.

- Statement Balance
The statement balance is the amount shown on your monthly billing statement. This does not reflect any new transactions or payments that have been made since the end of your last billing cycle.

- Transaction History
The transaction history is a detailed account of all the transactions you have ever made with your credit card. Billing statements will typically include the transaction history of the same billing cycle.