Borrowing with Credit Cards

Credit cards can be a convenient form of borrowing but they should be treated as just that--borrowing. When you make purchases with a credit card, you are borrowing money from the credit card company and you are paying that company for the privilege of borrowing. Credit cards are a revolving line of credit, which means that you can make an unlimited number of purchases up to a pre-approved dollar amount. Each month you must make a minimum payment, often a certain percentage of your bill.

Charge cards are like credit cards but you must pay the entire balance each month. This tutorial will focus primarily on credit cards.

Most credit cards are unsecured, meaning that you do not have to provide collateral, which is what you promise to give the bank if you do not repay the loan. People who have no credit or poor credit will often use a credit card secured by a savings account to establish a good record. For example, you may have a credit card with a $500 limit that is secured by a $500 savings account. If the account is not repaid, the savings account will become the property of the bank. Once you have established a good credit history with a secured card, you will be more likely to be approved for an unsecured credit card.

Specialized cards
Gold and platinum cards are credit cards with higher credit limits. These types of cards usually require a good credit history and higher income. However, not all gold and platinum cards have the same favorable terms. Be sure to carefully read the disclosures before signing up for any card.

Many businesses, such as airlines, hotels and gas stations, offer cards that earn rewards. Usually, for each dollar that you spend you earn points toward merchandise or services. These cards often have annual fees so be sure to weigh the fees with the benefits you are likely to receive before you sign up.

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