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What is a Credit Card?

If you haven't had your own credit card account, here's a brief overview to help you understand how it may fit into your money management plan. Using credit wisely is an important tool in establishing your financial independence. Credit cards are useful for emergencies, to build credit history, or for making travel arrangements, for example.

However, you must beware that the convenience offered by credit cards may be seductive in a society of instant gratification where the line between needs and wants is very thin. Credit cards make it easy to have what we want right now, but the price can be very steep. A credit card is not a free cash substitute.

A credit card establishes a revolving credit agreement between you and the issuer. You are given an account with a credit limit; once you pay back the amount you charge, that money is available to use again up to the credit limit.

By contrast, a loan is installment credit. The lender disburses a loan amount that you are required to pay back over time. The payments you make include interest on the remaining balance until the loan is repaid in full. To obtain more money from a lender, you apply and qualify for another loan.

Debit cards should not be confused with credit cards, even though they may have a VISA or Mastercard logo. A debit card transaction withdraws money directly from your checking account and should only be used when you have sufficient funds available to avoid an overdraft fee. When it comes to purchases, using a debit card that won't damage your credit history may be the best type of card for you as a student.

Several types of credit cards are available that serve different purposes.

  • VISA and Mastercard are bank cards issued through banks that are easy to get and tend to be accepted just about everywhere.
  • Charge cards like American Express and Diners Club are entertainment cards. Traditionally, these cards required the balance be paid in full every month, but this is no longer always the case.
  • Department store cards, issued by each store individually, and gasoline cards have terms of agreement that vary according to each company.
  • Secured accounts require you open a savings account that functions as your credit limit.