How Do Credit Cards Work? Complete Guide
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What Is a Credit Card?
Credit Card Interest
Credit Card Grace Period
Credit Card Minimum Payment
Credit Cards vs. Debit Cards
Credit History and Credit Score
Pros and Cons of Credit Cards
Pros of Credit Cards
Convenience: Easily make purchases online and in-store without carrying cash. Builds credit: Responsible use helps build your credit score. Rewards and cashback: Earn points, miles, or cashback on purchases. Fraud protection: Many cards offer zero liability for unauthorized transactions. Emergency funds: Provides financial flexibility in unexpected situations.
Cons of Credit Cards
High interest rates: Carrying a balance can lead to costly interest charges. Debt risk: Overspending can lead to financial difficulties. Fees: Some cards have annual fees, late fees, and foreign transaction fees. Credit score impact: Late or missed payments can lower your credit score. Temptation to overspend: Easy access to credit can lead to impulse purchases.
Tips to Make the Most of Your Credit Card
Pay Attention to Fees
Look for the Right Rewards for You
Make Sure You Can Pay Off Your Balance Every Month
Common Credit Card Terms to Know
APR stands for annual percentage rate, and is the way credit card interest is expressed. Your balance is the amount of money you owe on your credit card at any given time. The grace period is the stretch of time between the end of the billing cycle and the payment due date. If you pay off your balance in full during the grace period, you won’t be charged interest — but make sure your card offers one. Interest is the money you pay the card issuer for the privilege of borrowing funds, and it’s charged as a percentage of the amount you borrow. However, because credit card interest is compound, interest can also be charged on the interest you accrue, which is part of why it’s so easy to slip into credit card debt. The minimum payment is how much you must pay each month to avoid your credit card being marked delinquent by the issuer, which can lead to negative ramifications on your credit history and credit score.
The Takeaway
Frequently Asked Questions
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About the Author
Jamie Cattanach is a full-time freelance writer whose work has been featured at CNBC, Yahoo Finance, The Motley Fool, the Huffington Post and other outlets. At SoFi, she writes about investing, retirement, student loans and how to get your money right -- no matter what that means for you.
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