Credit Cards 101

A credit card is a card that allows you to borrow money against your credit limit. You use the card to make basic transactions online, by phone or in stores, which are then reflected on your monthly bill. You are charged interest on your purchases, though there is no interest charged if you do not carry your balance over from month to month – i.e. if you pay it off at the end of the month. Some credit cards have high interest rates, and your credit card balance and payment history can affect your credit score.

Difference between a credit and debit card

First a note on debit cards. Debit cards offer the convenience of a credit card but work in a different way. Debit cards draw money directly from your checking account when you make a purchase. Many people – including many millennials – prefer debit cards to credit cards because it’s easier to control spending with a debit card.

In the past, it used to be commonly thought that you needed a credit card to complete certain transactions, such as rent a car or to purchase items online, or that it was safer and easier to travel with a credit card than a debit card. Today, that’s not the case as much – but you should still check out your card’s specific benefits to see what’s included. Sometimes, credit cards do offer some benefits that debit cards do not.

Today, it’s atypical for debit cards to offer rewards. Additionally, if you pay for a large purchase (like a TV) with a debit card and then return the purchase, it may take some time for the refund to be returned to your checking account by the merchant.

Common terms to know

Now that you know more about the difference between debit and credit cards, you should learn the lingo of credit cards so you can better evaluate different credit card offers, as well as understand your current credit card account if you have one. Here are some of the more important terms:

Annual percentage rate (APR): the cost of credit as indicated by a yearly (fixed or variable) interest rate. This rate and the periodic rate (the APR expressed as a daily or monthly factor) must be disclosed to you before you become obligated on the card.

Balance computation method: the formula used to determine the outstanding balance on which you’re charged interest for the billing period.

Finance charge: the cost of credit for the billing cycle, expressed as a dollar amount and determined by multiplying the outstanding balance by the periodic rate.

Fees: charges (other than the finance charge) that may be levied against your account. Common examples include an annual fee, cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees.

Grace period: the length of time prior to your payment due date during which you may pay off your account without incurring any finance charge.

Line of credit: your credit line for a credit card is the maximum amount of money you can have outstanding on that card – otherwise known as your limit. For example, your credit card may have a limit of $9,000. Some institutions allow you to go over your limit, in which case you might be charged an over-the-limit fee. Other institutions do not let you charge beyond your limit. Having a limit in place can help you manage your spending – if you’d like us to decline transactions on your Patelco credit card that are over the limit, please contact us.

Get more guidance on choosing the right card

If you want help figuring out which card is right for you or just want to better understand how credit cards work, talk to one of our Certified Financial Specialists. They can meet with you at your local branch or set up a video or phone call.

Source(s) consulted: Broadridge Financial Solutions.