What Is a Credit Card?


A credit card is a plastic payment card that enables its holder to purchase goods or services on credit from a shop, company or financial institution. The cardholder agrees to pay the card issuer the full amount of the purchase price later, usually within a fixed period of time. A credit card also provides access to a line of credit for emergency and other expenses.

The main purpose of having a credit card is to give the cardholder the convenience and flexibility to make purchases and pay for them at a later date. It can also be used as an emergency source of funds and give users a way to build and maintain good credit history.

Types of Credit Cards

A credit card is a payment card issued by financial institutions that allows an individual to borrow funds from the issuer. Depending on the financial institution, there are many types of credit cards that serve varying purposes and offer different advantages.

a. Secured Credit Cards

A secured credit card is a great choice for individuals looking to establish or rebuild their credit history. With a secured credit card, a customer needs to make a deposit against their credit limit. If a person is unable to pay their bill, the financial institution will collect the unpaid balance from the customer's deposit. Credit limits on a secure credit card depend on the amount of the customer's deposit.

b. Unsecured Credit Cards

An unsecured credit card carries a higher risk for the issuer as no security deposit is required. In order to be eligible for an unsecured credit card, a person’s credit score needs to be within a certain range. Unsecured credit card possibilities range from reward credit cards to low interest credit cards with enticing features and benefits.

c. Prepaid Credit Cards

A prepaid credit card is a convenient and secure alternative to carrying cash. With a prepaid credit card, a person can load money onto the card in advance to use as they wish. Since the prepaid card is prepaid, the customer only spends the amount of money that is available on the card, helping one to avoid overspending. Prepaid credit cards are useful for students looking to manage spending while they’re in school or anyone else who struggles to stay on budget.

Benefits of Credit Cards

Credit cards offer a range of potential benefits for consumers who use them responsibly. From convenient payments to rewards and from building credit score to providing a financial safety net, credit cards can provide great relief and serve as a powerful financial management tool.

Convenient Payment Method

One of the key advantages of credit cards is that they provide a convenient payment method that can be used both online and in stores. Credit cards also allow you to separate personal expenses from business expenses and make it easier to track spending. Plus, credit cards can provide an extra layer of security when making purchases online, allowing you to dispute fraudulent charges.

Credit Card Rewards

One of the most popular benefits of having a credit card is the rewards they offer. Depending on the type of credit card and issuer, different rewards may be available. These rewards often include cash back, airline miles, and retail rewards. Credit card rewards can be a great way to make a few extra dollars.

Building Credit Score

For those who use their credit cards responsibly, credit cards can be a great way to build a strong credit score. Credit card companies report your activity to the credit bureaus, which are used to calculate your credit score. By making on-time payments, keeping balances low, and managing credit utilization, you can quickly build a good credit score.

Potential Drawbacks of Credit Cards

Using a credit card can be a double-edged sword, not only providing convenience and rewards, but also potential pitfalls. Here are the potential drawbacks to using credit cards that everyone should be aware of.

High Rates of Interest

Many credit cards offer low introductory interest rates as an incentive, however, once this phase ends you could be paying up to 20.99% p.a. or more. This rate, especially when combined with fees, could have a significant impact on your financial situation.


It is easy to get carried away when spending with a credit card, as it is not necessary to hand over cash. If you are not careful with your spending and fail to pay your balance in full each month, you could end up in a financial rut paying excessive interest.

Credit Card Fraud

The potential of fraud is a major fear when applying for and using credit cards. To keep your information secure, it is important to remain vigilant in monitoring your transactions and credit report. Additionally, it is recommended that only trusted websites are used for online purchases, and always remember to keep a lookout for scams.

How to Select a Credit Card

Choosing the right credit card can help you establish good credit and improve your financial situation. There are many cards to choose from, and many different factors to take into account, so it can seem daunting. By taking your individual needs, features, and fees into consideration, you'll be able to find the best card for you. And it's a good idea to review your credit score before applying for a credit card as well.

Consider your individual needs

Consider what it is you want to get out of a credit card. Do you need a low-interest card to help pay down debt, or do you want rewards for your purchases? Think about the types of purchases that you make the most throughout the year, and the types of rewards that will be the most beneficial for you. Are you looking to build your credit score and don't need to carry a large balance? Keep in mind that certain cards will have different benefits and drawbacks, so be sure to do your research.

Balance the features and fees

Once you have identified what you need and want from a card, it's time to look at the features and fees associated with it. Do the features and rewards have a cost, such as an annual fee? Are the rewards worth the fee? Are there any other fees or penalties attached to the card? Understanding all of the features and fees associated with the card will help you determine if it is the right card for you.

Review your credit score

Before you apply for a credit card, it's a good idea to review your credit score. After all, the type of card you get will depend on your credit score. Checking your score can also alert you to any errors or inaccuracies that could affect your application. Knowing your credit score will give you a better idea of what kind of credit card you may qualify for.

Doing the proper research and knowing what you need before applying for a credit card is key to making the right choice. By considering your individual needs, weighing the features and fees of the card, and reviewing your credit score, you should be able to find the right credit card for you.

How to Use Credit Cards Responsibly

Using a credit card responsibly can help you build your credit score and avoid costly debt. By following these three steps, you can make the most of your credit card and have a strong financial foundation.

Set a Budget for Spending

Your budget should outline how much you can afford to spend on your credit card each month. Aim to keep your spending lower than you can afford – spending within your means will help you avoid carrying high balances from month to month, which can damage your credit.

Monitor Purchases

Many organizations offer tools that help you track where and how much you’re spending. Establishing a budget and monitoring tools can help you stay on track and avoid impulse purchases.

Make Timely Payments

Making payments on time is the key to successful credit card use. Late payments can lead to interest charges, fees, and damage to your credit score. If cash flow is an issue, contact your credit card company to see if they offer any payment assistance options.

  • Set a monthly budget
  • Monitor your purchases
  • Make on-time payments

Take responsibility for your credit and use it wisely. By following the steps outlined here, you can use your credit card as an asset and build a strong financial future.


A credit card is a versatile tool that can be used to manage your budget, store funds, and build your credit score. Despite the potential pitfalls, credit cards can offer valuable benefits when managed thoughtfully. For those looking to build their credit and manage their funds, a credit card can be useful tool.

The key to managing a credit card is to be aware of the potential risks, understand the fees and rates, and stay within your budget. When used responsibly and with an understanding of the risks, benefits of a credit card make a difference.

Summary of Credit Cards

A credit card allows users to access a line of revolving credit. This line of credit is maintained with a credit card company and must be repaid by the borrower in accordance to the terms of the card agreement. Credit cards also provide users with access to various benefits such as rewards points, travel protection, and protection from fraud.

Benefits Managed Thoughtfully

When responsibly managed, a credit card can provide benefits to users, such as:

  • Builds credit score
  • Provides access to a line of credit without the need for collateral
  • Offers rewards or cashback for purchases made with the card
  • Protects the user from fraudulent activities
  • Offers access to travel or purchase protection

When used responsibly and managed thoughtfully, a credit card can be a useful tool for those looking to manage their budget and build their credit score. While there are risks with using credit cards, responsible management can offer a number of valuable benefits.

Expert-built startup financial model templates

1000+ Excel financial model templates for your business plan

Leave a comment

Comments have to be approved before showing up