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Understanding and Utilizing Credit Cards - Part 1

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What is a Credit Card?

The U.S. Census Bureau, Statistical Abstract of the United States reported a projection of 160 million credit card holders in the United States for 2012. Your credit card issuer can be a bank, credit union, store, gas company, etc. that gives you a plastic card. The plastic card has an established credit limit, which is the maximum dollar amount available for purchases. If you exceed your credit limit, the issuer can charge a penalty fee or over-the-limit fee. Another consequence of exceeding the credit limit is often an increase in your interest rate.

What is the Difference between a Loan and a Credit Card?

The credit card is similar to a loan except you do not need to get the full amount of the loan all at once. Each time you make a purchase, the amount of your available credit decreases. For example, if your credit card has a $5,000 credit limit and you make a $1,000 purchase, you still have $4,000 in available credit. Another difference between a loan and a credit card is that you can use your credit card repeatedly as long as you make on-time payments and you do not go over the established credit limit dollar amount. The term “revolving credit” is associated with credit cards because you may continue to borrow against the credit line over time.

What is the Cost of Using a Credit Card?

Your credit card issuer gives a grace period for repayment. The grace period is a certain amount of time from date of purchase until the payment is due – typically 20 to 25 days. If you pay the full amount of the balance on your credit card statement, there are no finance charges. If you pay the minimum payment or any amount below the full balance, a finance charge is added to your account. The finance charge is a fee for the extended use of credit, which gives a profit to the card issuer for using their money. The most common finance charge is for a percentage of your current balance due. The percentage is determined based on your credit worthiness.