What is a Credit Card?

Howdy Wall St. Willy! I saw someone using a credit card at the mall. But what is a credit card anyway?

Well, a credit card is a plastic card that you use to pay at stores and online.

But where does that money that you use to pay come from?

Well, a bank lends it to you but you have to repay that money. If you repay late, then you’ll be charged interest.

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Awww! How much interest do you get charged?

Well, it is one of the costliest forms of credit – so you get charged between 14% and 28% interest per year. But to qualify for a lower interest rate, you need a higher credit score.

Is there any other fee?

Yes, some credit cards have a $25 to $500 annual fee, which is every year.

But, how long do I have to pay back the bank?

Normally you get 30 days where you are not charged interest but after that you’ll be charged interest.

But what are the benefits of a credit card?

Well, you get free credit for up to 30 days, you get the convenience of not carrying any cash and you can consolidate or combine all the payments into one.

You can also get rewards.

What kind of rewards?

The rewards can be in the form of points or miles. They can be exchanged for different things like cash back, airline tickets and merchandise.

Where can I get a credit card from?

Well, you can get them from banks, credit unions and credit card companies.

You can apply for them online by visiting their website. You need your address and Social Security Number.

But instead of going through all that hassle, can I just make my own credit card?

YOU CANNOT!

Okay Okay Okay! Well, what should I consider while choosing a credit card?

Well, you should consider the interest rate (the lower, the better), the annual fee if it has any. But, if it does, then the lower the better.

And rewards – depending on what you do more, you can choose between a mile card or a cash back card.

Well, what if I cannot repay the money?

Well then, the credit card debt will keep on piling up because of the high interest rate. That would also negatively impact your credit score.

That’s not good. Can anything be done in this situation to help make it better?

Yes, but that’s a topic for another time.

Thank you very much for explaining to me what a credit card is, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

Podcast: What is a Credit Card?

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