What Is a Credit Card?

A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services
company, that allows cardholders to borrow funds with which to pay for goods and services with
merchants that accept cards for payment. Credit cards impose the condition that cardholders pay
back the borrowed money, plus any applicable interest, as well as any additional agreed-upon
charges, either in full by the billing date or over time. An example of a credit card is the Chase
Sapphire Reserve. (You can read our Chase Sapphire Reserve credit card review to get a good
sense of all the various attributes of a credit card).

In addition to the standard credit line, the credit card issuer may also grant a separate cash line of
credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that
can be accessed through bank tellers, ATMs or credit card convenience checks. Such cash
advances typically have different terms, such as no grace period and higher interest rates,
compared to those transactions that access the main credit line. Issuers customarily pre-set
borrowing limits, based on an individual's credit rating. A vast majority of businesses let the
customer make purchases with credit cards, which remain one of today's most popular payment
methodologies for buying consumer goods and services.

Understanding Credit Cards

Credit cards typically charge a higher annual percentage rate (APR) versus other forms of
consumer loans. Interest charges on any unpaid balances charged to the card are typically
imposed approximately one month after a purchase is made (except in cases where there is a 0%
APR introductory offer in place for an initial period of time after account opening), unless
previous unpaid balances had been carried forward from a previous month—in which case there
is no grace period granted for new charges.

By law, credit card issuers must offer a grace period of at least 21 days before interest on
purchases can begin to accrue.1

That's why paying off balances before the grace period expires is a good practice when possible.
It is also important to understand whether your issuer accrues interest daily or monthly, as the
former translates into higher interest charges for as long as the balance is not paid. This is
especially important to know if you're looking to transfer your credit card balance to a card with
a lower interest rate. Mistakenly switching from a monthly accrual card to a daily one may
potentially nullify the savings from a lower rate.

Responsible Credit Card Uses

Personal finance experts spend a lot of energy trying to prevent us from using credit cards—and
with good reason. Many of us use credit cards irresponsibly and end up in debt. However,
contrary to popular belief, if you can use the plastic responsibly, you're actually much better
off paying with a credit card than with a debit card and keeping cash transactions to a minimum.
Let's examine why your trusty credit card comes out on top, and certain credit card uses
and strategies to employ.

1. One-Time Bonuses

There's nothing like an initial bonus opportunity when getting a new credit card. Often times,
applicants with good credit or excellent credit can get approved for credit cards that offer
commonly offer bonuses worth $150 or more (sometimes much more) in exchange for spending
a certain amount (anywhere from $500 to several thousands of dollars) in the first several months
the account is open. Other cards entice applicants with bonus reward points or miles that can be
redeemed for travel, gifts cards, merchandise, statement credits or checks (more on those below).
In contrast, a standard debit card that comes with a bank checking account generally offers no
initial bonus or ongoing rewards-earning opportunity.

2. Cash Back

The cash back credit card was first popularized in the United States by Discover, and the idea
was simple: Use the card and get 1% of your purchases rebated in the form of cash back. Today,
the concept has grown and matured. Now, some cards now offer 2%, 3% or even as much as 6%
cash back on selected purchases, though such lucrative offers involve quarterly or annual
spending caps.1 The best cash back cards are those that charge minimal fees and interest, while
offering a high rewards rate.
Some cards, like the Fidelity Rewards card, offer a high 2% rate of cash back rewards on all
spending but you must deposit your cash directly into a Fidelity investment account.2

3. Rewards Points

Reward points credit cards are set up to allow cardholders to earn one or more points per dollar
in spending. Many reward credit cards provide bonus points for certain categories of spending
like restaurants, groceries or gasoline. When certain earnings thresholds are reached, points can
redeemed for travel, gift cards from retailers and restaurants, or for merchandise items through
the credit card company's online rewards portal.

Your credit card rewards options are almost endless. Get a co-branded card offered in
partnership with a hotel chain, clothing retailer or even a nonprofit organization like AARP and
you can leverage your everyday spending to earn valuable rewards day in and day out. 3 The trick
is to find the card that best fits with your spending patterns. Doing the inverse—altering your
spending patterns to fit with a particular card—can be counterproductive. But if you're already
spending money on a regular basis with a certain retailer or have an affinity for a certain hotel,
why not use the card that will encourage your continued patronage by offering you enhanced
rewards, discounts and perks?

4. Frequent-Flyer Miles

This perk predates almost all the rest. Back in the early 1980s, American Airlines began offering
the consumers a novel way to earn frequent-flyer miles when not flying by forming a partnership
with credit card giant Citibank.4  5 Now, all domestic and international airlines have at least one
credit card available offered in similar partnership with major credit card issuers.

Cardholders generally earn miles at a rate of one mile per dollar in net purchases, or sometimes
one mile per two dollars spent for lower-end card options that have no annual fee. How valuable
this reward actually is depending on the type of airline ticket you purchase with your points or
miles. Many frequent flyer cards are made immensely more valuable by their mileage-based
introductory bonuses. These are often enough to put you 50–100% of the way toward an award
flight after meeting the initial spending requirement involved.

5. Safety
Paying with a credit card makes it easier to avoid losses from fraud. When your debit card is
used by a thief, the money is missing from your account instantly. Legitimate expenses for which
you've scheduled online payments or mailed checks may bounce, triggering insufficient funds
fees and making your creditors unhappy. Even if not your fault, these late or missed payments
can also lower your credit score.6 It can take a while for the fraudulent transactions to be
reversed and the money restored to your account while the bank investigates.

By contrast, when your credit card is used fraudulently, you aren't out any money—you just
notify your credit card company of the fraud and don't pay for the transactions you didn't make
while the credit card company resolves the matter.7

Credit card networks like Visa and MasterCard provide zero liability coverage for unauthorized
purchases as a way to encourage usage of their card over cash and check.8  9

Credit card companies can also help resolve refund issues when consumers are unable to resolve
merchant disputes on their own.

6. Keeping Vendors Honest

Say you hire a tile setter to set some flooring in your entryway. Workers spend the weekend
cutting, measuring, grouting, placing the spacers and tiles and letting the whole thing set. They
then charge you $4,000 for their troubles.

You draw upon your savings account and write a check. But what do you do when, 72 hours
later, the tile starts to shift and the grout still hasn't set? Your entryway is now a complete mess,
and that vein in your forehead won't stop throbbing.

You can take up the issue with your state licensing board, but that process could take months and
the contractor still has your money. That's why, if you can, you should pay for a big-ticket item
like this with a credit card. The issuer has an incentive to discourage fraud among its vendors,
and if there is a problem, they have a mechanism to try to resolve it. More important, if you
dispute the charge, the card issuer withholds the funds from the tile setter, and not only will you
get your money back, you might even get help finding a new contractor.1 0
7. Grace Period

When you make a debit card purchase, your money is gone right away. When you make a credit
card purchase, your money remains in your checking account until you pay your credit card bill.

Hanging on to your funds for this extra time can be helpful in two ways. First, the time value of
money, however infinitesimal, will save you money. Delaying eventual payment makes your
purchase a tiny bit cheaper than it would be otherwise. Beyond that, your cash will spend more
time in your bank account, and if you pay your credit card from an interest-bearing checking
account and earn on your money during the grace period, the extra will eventually add up to a
meaningful amount. vs. paying with a debit card, cash or check.

Second, when you consistently pay with a credit card you don't have to watch your bank account
balance as closely.

8. Insurance

Most credit cards automatically come with a number of consumer protections that people don't
even realize they have, such as rental car insurance (though often secondary to your personal
auto insurance), travel insurance, and product warranties that may exceed the
manufacturer's warranty.

9. Universal Acceptance

Certain purchases are difficult to make with a debit card. When you want to rent a car or stay in a
hotel room, you'll almost certainly have an easier time if you have a credit card. Rental car
companies and hotels want customers to pay with credit cards because it makes it easier to
charge customers for any damage they cause to a room or a car. Another reason is, unless you
have prepaid for your rental or hotel stay, the merchant doesn't know the final amount of your
transaction and therefore needs to block out a certain amount of your available credit line in
order to protect themselves from potential charges they didn't anticipate.

So if you want to pay for one of these items with a debit card, the company may insist on putting
a hold of several hundred dollars on your account. 1 1 Also, when you're traveling in a foreign
country, merchants won't always accept your debit card—even when it has a major bank logo on
it.
10. Building Credit

If you have no credit or are trying to improve your credit score, using a credit card responsibly
will help because credit card companies will report your payment activity to the credit bureaus.
Debit card use doesn't appear anywhere on your credit report, however, so it can't help you build
or improve your credit.