A credit card is a type of financial product that allows you to borrow money from a lender in order to make purchases or withdraw cash. Credit cards are issued by banks and other financial institutions, and they typically come with a credit limit, which is the maximum amount of money you are allowed to borrow.
When you use a credit card to make a purchase, the lender will pay the merchant on your behalf and you will be required to repay the lender at a later date. Credit cards usually have an annual percentage rate (APR), which is the interest rate that will be applied to any unpaid balances.
There are many different types of credit cards, each with its own features and benefits. Some credit cards offer rewards programs, which allow you to earn points or cash back for every dollar you spend. Other credit cards offer low APRs or fees, which can make them a good choice for borrowers who plan to carry a balance from month to month.
How to choose a credit card
There are many factors to consider when choosing a credit card. Here are a few things you may want to consider:
- Annual fee: Some credit cards charge an annual fee, which is a charge that is assessed each year for the use of the card. If you don’t think you will use your credit card enough to justify the annual fee, you may want to look for a card that doesn’t have one.
- Interest rate: Credit cards usually have an annual percentage rate (APR), which is the interest rate that will be applied to any unpaid balances. If you think you will carry a balance from month to month, you may want to look for a card with a low APR.
- Rewards program: Many credit cards offer rewards programs, which allow you to earn points or cash back for every dollar you spend. If you think you will use your credit card a lot, you may want to look for a card with a rewards program that aligns with your spending habits.
- Credit limit: Your credit limit is the maximum amount of money you are allowed to borrow with your credit card. If you think you will need a high credit limit, you may want to look for a card that offers a higher limit.
- Other features: Some credit cards offer additional features such as fraud protection, travel insurance, or extended warranties on purchases. If any of these features are important to you, you may want to look for a card that offers them.
- Local bank: It can often be best to choose a credit card that is issued by a bank that is located in your state (or country if you are outside the US. As an example: A Swede looking for a credit card should always look for a credit card issued by a Swedish bank or financial institute in cooperation with a large payment processor such as VISA, MasterCard or AMEX.)
Dangers of credit cards
There are several potential dangers of using credit cards:
- Debt: One of the main dangers of credit cards is the risk of accumulating too much debt. If you don’t pay off your balance in full each month, you will be charged interest on your unpaid balance, which can quickly add up. If you carry a balance from month to month, you may end up paying more in interest than you originally borrowed.
- Credit score: Your credit score is a measure of your creditworthiness and is used by lenders to determine your eligibility for loans and other financial products. If you don’t pay your credit card bills on time, your credit score may suffer, which can make it harder for you to get approved for credit in the future.
- Fraud: Another potential danger of credit cards is the risk of fraud. If your credit card is stolen or used without your authorization, you may be held responsible for any unauthorized charges. To protect yourself from fraud, it is important to be vigilant about protecting your credit card information and to report any suspicious activity to your credit card issuer as soon as possible.
- High fees: Credit cards can also be expensive if you are not careful. Some credit cards charge annual fees, balance transfer fees, cash advance fees, and other charges that can add up quickly. It is important to read the fine print and understand all of the fees associated with your credit card before you use it.