How Credit Cards Work

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What are the different types of credit?

Credit is money that a bank or credit card issuer lends you. You can get a loan for a specific purpose, such as financing a new car, buying a home or paying college tuition. Loans are generally divided into 2 types: secured and unsecured.

• A secured loan is a loan that is guaranteed by collateral – that is, an item of equal or greater value than the amount of the loan, such as a house or car.

• An unsecured loan is not guaranteed by anything.

Another type of credit is a credit line linked to your checking account that will give you added protection if you write a check for more than what you have in your account. And there are credit cards, perhaps the most common type of personal credit. Find out more in Types of Credit.

What is the difference between a debit card and a credit card?

Using a credit card is like getting a loan. Every time you charge something, you’re borrowing money until you pay it back later that month, or over time. In exchange for this loan, the credit card company adds interest charges to your account, which you must pay along with the purchase amounts. Debit cards are used to make purchases at retail locations in the same way credit cards are used, however the money comes directly from your checking or savings account. Find out more at Types of Credit.

How does a credit card work?

Using a credit card is like getting a loan. It’s not free money. Every time you charge something, you’re borrowing money until you pay it back later—either that month or over a period of months. If you choose to pay the money back over time, the credit card company adds interest to your account that you must pay along with the purchase amount. For more credit card basics, go to How Credit Cards Work and listen to our Podcast.

How do I choose the right credit card?

Selecting the right card for you depends on how you plan on using it. Everyone has different financial needs and priorities. But there are 3 key things that you should look for when choosing a card:

  • Does it offer the best rate for you?
  • Does it meet your spending needs?
  • Are you getting something back for spending on this card, like earning rewards, cash-back, merchandise, etc.

And any good credit card should come with tools to help you manage your spending. Email alerts, automatic bill pay, and bill managers are just some of the features available. Find out more in Choosing the Right Card.

How many credit cards should I have?

Credit is a powerful tool—but it’s also a big responsibility. In general, the number of credit cards you have in your own name should be based on your income, budget and ability to manage money. Before trying to determine how many cards to have, create a plan for repaying what you charge. It is also important to remember if you have more credit cards than your income can support, it could have a negative effect on your overall credit. Check out Your Credit History for more info.

How do you apply for a credit card?

After you’ve chosen the best credit card for you and have carefully read the card’s terms, you fill out a credit application. Creditors will collect information about you and your credit experience from this application and look at key factors such as your bill-paying history, outstanding debt and your ability to make payments based on your income and financial position. You have considerable control over these factors based on how you manage your credit, so it’s important to always keep them in mind.

Is it OK if my credit card line has increased?

Card issuers may increase your Credit Line if you demonstrate an ability to use the card responsibly, such as paying bills on time, as well as if your annual income increases. You can always request to keep your account at the previous Credit Line if you feel that you might be tempted to overextend yourself.

How do you maintain good credit?

Always pay your bills on time, every time. Pay late or go over your limit, and you'll not only pay a fee, but it can appear on your credit report. And don't apply for more credit cards than you need—too much available credit can make you look like a risk to future lenders. Get more helpful advice at 10 Healthy Credit Tips.

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