What is a credit card?

A credit card is a small piece of plastic designed to fit in your wallet that represents an amount of credit that a lender has agreed to extend to you. Basically, you to approach a lending institution like a bank, and offer them proof that you are a low risk applicant who can be trusted to repay a debt. They will look at things like your job history, credit history, bank account and current debts to decide if they want to extend you credit and how much they will charge you for that privilege. One you are approved, you receive a plastic credit card with a certain amount of pre-approved credit attached to it.

The card is embedded with a magnetic strip or a microchip that holds the information regarding the revolving line of credit for which you are eligible. When you use this card to purchase goods or services, the lending institution is immediately contacted and notified. They pay for the item on your behalf.

Then you are issued a monthly statement of all your purchases and any additional charges. Typically, if you pay off the charged amount immediately there are no fees. If you do not pay off the full amount within the agreed upon time frame, usually one month, then the interest rate that you have agreed to pay kicks in. This is how credit card companies and lenders make their money. Most people do not pay off the full amounts and end up paying interest to lending institutions every month. You can also be charged an annual fee by some providers.

There are many benefits to having credit cards, if you use them responsibly. Those people who pay off balances immediately will see an increase in their FICO score or credit rating (click here for free credit score offers). This makes them more appealing to other lenders. So when it comes time to apply for a mortgage loan or other type of loan, they will benefit from the lowest available interest rates.

On the other hand, poor credit card management has the opposite effect. Opening and closing accounts, transferring balances, and making late payments are all actions that will lower your credit score. If you don’t know yours you can check in with the three credit reporting bureaus: Experian, TransUnion, and Equifax to get their copies of your rating. Or you can see your exact FICO score by visiting that website.

So the short answer is that a credit card represents a line of credit that is extended to you. The more accurate answer is that a credit card is what you make of it: a valuable tool or a dangerous trap. If you want to find a credit that will meet your needs, use an online tool like our credit card “Chaser” that will help you locate a credit card designed to work for you rather than against you. Get started comparing credit cards today!

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Disclaimer: This content is not provided or commissioned by American Express, Visa, MasterCard, Discover, or any other credit card company or issuer. The opinions expressed here are the author's alone, not those of any credit card company or issuer, and have not been reviewed, approved or otherwise endorsed by any credit card company or issuer. Credit Card Chaser may be compensated through various affiliate programs with advertisers. As always, Credit Card Chaser is an independent website commmitted to helping people research credit card offers and find the best credit card!