Credit cards are a regular part of modern life. Look around any store or gas station or restaurant and you’ll see them. Nearly everything that needs to be paid for can be paid by credit card. They’ve become an important part of our lives, so it’s important to understand what they are, how they work, and how to use them wisely.

How do Credit Cards Work?

Using a credit card is essentially borrowing money. The company that issues your card pays for your groceries or your cup of coffee and you agree to pay them back according to the terms you both agreed to. These terms usually include how long it should take you to pay them back and how much interest they will charge you if the amount is not paid in full by the agreed-upon date.

A credit card is different from a debit card, which pulls the money directly from your bank account. This money is not being borrowed and as a result does not have to be repaid.

Types of Credit Cards

Many credit cards offer rewards for using them, such as cash back or points that can later be exchanged for travel or discounts at a specific store. There are often many benefits to these cards, especially when you pay the bill in full each month. Low interest cards trade the rewards for a low interest rate, making it less expensive if you carry a balance on the card. There are also credit cards designed specifically for students, who may not have much credit history, to help them start to build their credit.

Pros and Cons of Credit Cards

There are many advantages to having and using credit cards. In addition to rewards and establishing and building your credit rating, credit cards offer convenience both in purchasing and planning how to pay your bills. Many cards offer a sign-up bonus for starting an account, along with 0% interest during a specific introductory period, which can be helpful if you need to make a larger purchase or transfer a balance from a higher interest card.

Credit cards are not without dangers and pitfalls, however, and consumers should be well-informed. In addition to interest charges if you carry a balance, there are other fees that you should be aware of, watch for in the fine print, and try to avoid. Late payment fees can be added in addition to interest charges if you are late with a payment. Many cards, especially rewards cards, come with an annual fee. You should weigh the value of the rewards you expect to receive against the annual cost of using this card. Fees are often charged on balance transfers and foreign transactions. If you’re planning to transfer a balance or travel internationally, be aware of these charges.

Make the Most of your Credit Card

It’s relatively simple to make the most of your credit card to maximize the advantages and minimize the disadvantages. Spend within your means so that you are always able to pay your bill each month, on time and in full. Stick to cards with no annual fees and keep track of your spending. To establish or raise your credit score, try to keep your balance below 30% of your credit limit (divide your credit limit by 3 to estimate this) and wait at least six months between each new credit card application.

To learn more, read Credit Cards 101.

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