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Financial Education

Charge It Right

Credit Card Characteristics

Credit cards are a convenient form of borrowing. People generally use credit cards to purchase goods and services.

Credit cards represent a revolving line of credit. This means you can make an unlimited number of purchases, up to a pre-approved dollar limit, such as $3,000. You must pay at least a portion of the bill every month. This is called a minimum payment. It is often a percentage of your balance.

Charge cards are used like credit cards, but you must pay the entire balance every month. In this course we focus on credit cards rather than charge cards.

Most credit cards are unsecured. This means you do not have to provide collateral. Collateral is what you promise to give the bank if you do not repay the loan. Examples of items that can be used as collateral include homes, cars or savings and investment accounts. However, you might want to consider a secured credit card if you have no credit history or have had credit problems in the past.

To get a secured card, you generally need to pledge a bank savings account as collateral. This means the bank holds the savings account as security for repayment. For example, if you want a credit card with a $500 limit, the bank might require you to keep $500 in a bank savings account. You will not be able to withdraw money from that account. The $500 account assures the bank you will pay the credit card bill.

Once you establish a good history by paying your credit card bills on time, you will have a better chance of getting an unsecured credit card.

Usually, gold and platinum cards are credit cards with higher credit limits. These types of cards usually require a good credit history and higher income. However, not all gold and platinum cards have the same favorable terms. Be sure to carefully read your disclosures.

Many airlines and hotels offer rewards cards. When you use these credit cards, you earn points towards goods or services. You are usually charged annual fees for rewards cards.

You can apply for a credit card at:

Retail stores - many department, clothing and jewelry stores offer credit cards that can be quickly approved. Retail credit cards usually have lower credit limits and higher interest rates than bank credit cards.

Banks - you can find bank credit cards offers at your local bank, in newspapers or on the Internet. Banks and other financial institutions offer both secured and unsecured credit cards with varying credit limits and rates.
Before accepting any offer, always remember to look at all the terms. Pre-approved credit offers are subject to verification of income, employment and credit history. Remember to shop for the best deal. You should always be sure to read the credit agreement carefully. There may be limitations or conditions not obvious in the advertisement. For example, credit card issuers might encourage you to transfer balances from other credit cards (balance transfers). There might be hidden costs with these transactions.

Before you decide to apply for a credit card, decide what it will be used for. Keep in mind, a credit card is not free money. It is a loan you must repay.

Now that we've reviewed some of the credit card basics, let's look at how you can find the best credit card deal .