A beginner’s guide to the credit card
What it actually is, how the bank makes money from it, and the handful of terms worth understanding before you sign anything.
A credit card looks like a debit card and behaves nothing like one. A debit card spends money you have. A credit card spends money a bank lends you, on the understanding that you return it by a date.
How the arrangement works
The bank pays the merchant immediately. You owe the bank. At the end of a billing cycle you get a statement listing everything you spent, a total due, and a date by which to pay it.
Pay the total by that date and the borrowing cost you nothing. Pay less, and interest begins. That is the entire business model, and it explains almost every feature of the product.
The card is free if you repay in full and expensive if you do not. Everything else is detail.
The terms worth knowing
| TERM | WHAT IT MEANS |
|---|---|
| Credit limit | The maximum you can owe at any one time |
| Statement date | The day your bill is generated |
| Due date | The day payment must reach the bank |
| Minimum due | A small fraction of the total. Paying it avoids a late fee, not interest |
| Interest-free period | The gap between a purchase and the due date, only if you pay in full |
| Cash advance | Withdrawing cash. Charged a fee, with interest from day one |
What you actually get in return
Used properly, a card gives you a few things a debit card does not.
- A short, free loan every month, which smooths the gap between spending and income arriving.
- A documented borrowing record, which is what builds a credit file.
- Stronger protection on disputed transactions, because the money has not left your account yet.
- Rewards and offers, which are real but should never be the reason to spend.
Worth knowing
If a card is offered to you with an annual fee, ask what you get for it and whether the fee is waived above a spending threshold. Many are. Nobody will tell you unless you ask.
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