What are Credit Cards?

Physically speaking, a credit card is a piece of plastic or metal. But the actual credit card definition is a bit more nuanced.
 
A credit card allows you to borrow money from a financial institution to purchase items or withdraw cash. People often use credit cards to make payments for goods and services, but you can also use a credit card for a short-term loan.
 
However, before you rush off to apply for a credit card, keep reading to learn some important facts about them.

What are credit cards?

Credit cards are a means for the cardholder to borrow money against a line of credit for purchases or cash withdrawals. Credit cards are issued by banks or credit unions, and you can use them anywhere that accepts your particular credit card as payment. After making your monthly purchases, you must either pay the full outstanding balance each month or make a minimum payment on your balance.

Credit cards vs. debit cards

When it comes to making purchases with a card account, there are two main types of cards: credit cards and debit cards.

Credit cards offer the ability to make purchases even if you don’t have the funds at that time and may offer a higher spending limit than debit cards. However, credit cards also come with the risk of high interest rates if you don’t pay off your balance in full each month and fees if you don’t pay on time.

A debit card, on the other hand, is linked directly to your bank account. That means you can only spend what you have available in your account, otherwise the transaction will not go through. While this can help you avoid debt, it also means that you may not be able to make large purchases if you don’t have enough money in your account.

How do credit cards work?

When you use a credit card, you’re borrowing money from the credit card issuer. So, you’ll need to pay back the money you borrowed plus interest and any fees. Interest is typically charged when you don’t pay your entire balance by the due date. Some credit card companies may even charge an annual fee just for using the card. However, Discover has no annual fee on any of our credit cards.

Credit cards can be a convenient way to make purchases, but it’s important to use them wisely in order to avoid paying interest and fees.

When used responsibly, credit cards can help you contribute to your credit history and improve your financial standing. It’s recommended to stay within your means and make timely payments.

Should you get a credit card?

If you’re thinking about getting a credit card, there are a few things you may want to take into account.

First, consider whether you’re the type of person who can handle credit responsibly. If you tend to overspend or carry a balance from month to month, a credit card may not be ideal for you. On the other hand, if you’re good at sticking to a budget and paying off your balance each month, a credit card can be a tool with valuable benefits.

Here are some reasons you may consider applying for a credit card:

• Build credit history
• Improve credit score
• Improve cash flow with a line of credit when necessary
• Make purchases that you may not be able to make with cash
• Protect your finances in the event of fraud or theft
• Make a large purchase with an intro 0 percent APR credit card to pay off over many months

Pros and cons of using a credit card

Credit cards are a convenient way to make purchases and earn rewards, but they can become costly if you don’t use them carefully. Let’s take a look at the pros and cons of using credit cards so that you can make an informed decision that aligns with your financial needs.

Using a credit card can be beneficial for some people, in that they can earn rewards on their purchases or build their credit history. But these benefits may be outweighed by other factors, like credit card fees or the temptation to spend more than you can afford.

There are both pros and cons to using a credit card that you might want to weigh before deciding whether you’d like to use one. For some people, if the convenience and rewards offered by credit cards outweigh the cons, then it may be the best thing for your financial situation to get one.

Different types of credit cards

There are different types of credit cards available, and each offers unique benefits. The one that’s ideal for you depends on your needs and goals. Here’s a breakdown of the different types of credit cards and what they offer.

Rewards credit cards

Simply put, credit card rewards are incentives that a lender offers its cardmembers for using its card. Popular rewards include cash back or miles.

For example, many travel credit cards offer one mile for every dollar you spend. However, with the Discover it® Miles Travel Credit Card, you can earn 1.5x Miles on every purchase.  Plus, get an unlimited Mile-for-Mile match of all the Miles you earn at the end of your first year, automatically. There is no limit to how much we’ll match.¹

Cash back rewards

Cash back is a perk that some credit card issuers offer that allows cardmembers to earn back a percentage of the money spent on that credit card on eligible purchases.

Secured credit cards

A secured credit card is backed by a deposit that you make with the issuer. The deposit serves as collateral for the credit limit on the card. This means that if you default on your payments, the issuer can use your deposit to cover the outstanding balance. The Discover it® Secured Card can help you build/rebuild credit with responsible use.²

Student credit cards

A student credit card may be a good way for college students to start building their credit history. By using a student credit card responsibly and making on-time payments, students can begin to establish themselves as creditworthy borrowers. Student credit cards often have lower credit limits than regular credit cards, which can help students avoid getting in over their heads.

Co-branded or retailer credit cards

A retailer credit card is issued by a specific store or retail brand. Retailer cards are typically good only at that particular store, or the store’s website.

Co-branded cards, such as those issued by hotels or airlines, may be used at different types of merchants that accept credit card payments, but might give extra benefits on purchases of that brand’s product.

Credit cards can be a great way to build your credit history, rack up rewards, or simply make everyday purchases more convenient. But before you tap, swipe, or insert, it’s important to understand the basics of credit cards. With our guide in hand, you should feel equipped to make a decision that is right for your financial needs.