A credit card is a form of payment that a borrower can use to buy things. However, the money used isn't the
borrower's but instead money borrowed from the issuer of the card. How much a someone can spend/borrow at a
time is their credit limit. This is limit is decided based on your credit score, income, and a variety of
other factors.
At the end of each billing cycle, (typically the end of the month) the borrower will receive a statement
outlining all the purchases made and the amount they borrowed. Once the borrower has received their
statement they can either choose to pay it off in full, pay off the minimum and begin accruing interest, or
some amount between minimum and full and still be charged interest.
Why use a credit card? For many people, the "buy now pay later" can be a lifesaver when living paycheck to
paycheck. More importantly, credit cards can be used to build your credit score to make future loans for
homes or cars more affordable. Even if you pay off your credit card in full every month, your credit score
will improve.
In fact, putting purchases on credit cards can be used to save money. This is because
many credit card companies offer discounts, cash back, and point based rewards systems that encourage you
to make transactions using their cards.
The minimum monthly payment is an amount of money decided by a lender that a borrower needs to pay to keep
their account in good standing and avoid late fees and negative impacts on their credit score. This is
usually the interest owed plus a small percentage of the total balance, typically 2%.
While this may seem like a good option to someone in financial trouble, it will probably only keep them in
debt. This is because the minimum payment is rarely enough to pay off the balance in a reasonable amount
of time.
Many people either aren't financially literate enough to understand the consequences of only paying
the minimum payment, or they are in a situation where they can't afford to pay any more.
Credit card companies are aware of this and will often advertise the minimum payment as a way to entice
people to take on more debt.
Use the graph below to better understand just how bad minimum monthly payments are for long term success.
Don't forget to change the % of balance to see how much money you can save just by paying a tiny bit more.
Interest must be larger than 0 and less than 23
APR stands for Annual Percentage Rate and is the total cost of borrowing money from a lender per year.
This includes the interest rate and any fees associated with the loan.
For example, if you have a $10,000 loan from one lender at 20% APR, you'll end up paying around $2,000 in
one year on fees and interest. All lenders are required to disclose this number and it's a good way to
compare different loans.
The graph below shows the average interest rate for credit cards. This does not include any fees that may be
associated with the cards so the APR is likely higher than what is shown in the graph. While your APR will
depend on your credit score, it will still increase and decrease with the average.
There are hundreds of cards out there, each with their own rates, fees, and rewards. Some cards exist to serve a single purpose, while others can be used for anything. Below are the most common and relevant types of cards that you may be interested in.