Credit cards tend to be a somewhat divisive conversation point in the financial realm. While many people view credit cards as a necessity, there are a healthy number of those who staunchly oppose them. Both sides have valid arguments for their own opinions. This article will be a two-part set, with this first installment explaining and answering some of the more common questions and terms about what a credit card is. The second installment, which you can read right after this one, walks through a comparison of a few different credit card options and seeks to help you understand the decision-making process and what to look for when getting a new credit card.

1. What is a credit card?
   A credit card is a thin, rectangular piece of plastic or metal that is provided by a store, a bank or a different financial institution that allows the cardholder to pay for services or goods with borrowed funds.
   These borrowed funds must be paid back according to the conditions specified by the credit card, which include the amount borrowed as well as any interest or any other additional fees agreed on by the billing date.
   The billing date is typically within a 30 to 40 day window from the original day the funds were borrowed.
2. Who can I get a credit card from?
   As discussed above, a credit card is issued by a financial institution. Credit cards are probably most associated with banks or credit unions, but they can be found in most stores as well.
   Other credit cards are their own companies such as American Express who specialize in offering clients credit cards and other charge cards.
3. What is the difference between a credit card and a debit card?
   Both a debit card and a credit card look essentially identical. They are both cards and both give you access to funds that you can use to purchase things.
   There are three key differences though that make each of these cards distinctly different.
   Source of the funds
   For a credit card, as we discussed in the first question, the money it provides is borrowed from a creditor. This creditor is providing access to the card holder with funds that are not the card holders own, personal funds.
   With a debit card, the card user has access to his or her personal funds – or the assets you have in cash in a bank. Debit cards are issued by banks or other financial institutions that provide the service of securely holding your money. A debit card gives you access to that money, from your personal bank account.
   Amount of funds accessible
   A second key distinction between a credit card and a debit card is how much money you have access to.
   Since a debit card gives you access to only the funds which you have in cash, the financial limit of a debit card can be much different than a credit card. Here is a quick illustration to help understand why this is.
   Many credit cards offer a cap on what you can spend on that card. For sake of illustration, let us say that you have a credit card that has a limit of $1,000. Whenever you use that card, you can spend upwards of $1,000 in each billing cycle.
   Now in comparison, a debit card offers you access to your cash assets held by your bank. If you have $500 in cash in your bank account, then your debit card would provide you access to $500. In this example, a credit card may be more helpful because it gives you an additional $500 to use that you do not have.
   On the other hand, let us say you have $20,000 in your bank account. In this example, you can purchase something with your debit card that is much more expensive than you can with the credit card that only allows you access to $1,000.
   Repayment of the funds
   A final key distinction between a credit card, and a debit card is the cost of using the funds.
   Since a debit card gives you access to your own personal money, you do not have to repay that money. A credit card however, is a borrowing of funds, so the money used each billing cycle needs to be paid back to the organization the money was borrowed from.
   A quick example. If you purchased $100 worth of groceries with your debit card, your bank account is now $100 less, but you do not have to put the money back into your bank account. You can go on with your life with $100 dollars less and not have to answer to anyone.
   In contrast, if you purchase the same $100 worth of groceries with your credit card, your bank account will remain the same but you will have to pay the $100 dollars back to the credit card company in the billing period.
4. What is APR?
   APR is one of the more misunderstood concepts of credit cards, and a big reason why many people are against credit cards. APR stands for Annual Percentage Rate. The APR simply represents the amount of money in percentage that you will owe the credit card company you borrowed the money from if the payment is not settled in the billing cycle. This APR number is annual so the amount owed is broken into monthly amounts that will be 1/12th of the annual APR amount.
   Back to our grocery example above, if you have a 17% APR on your credit card (which is common or even on the lower end for many cards), and you do not pay back the $100 you owe for those groceries within the billing period, you will incur a 17% annual fee in addition to the original amount owed.
   Doing some quick math, an additional 17% APR on the original $100 charge brings the new charge to $101.41 which is an increase of $1.41 (which is the 17% APR broken into a monthly charge).
   Now, that may not seem like much, but the majority of credit card holders carry a significant more in balance over just $100. According to Credit Karma, the average credit card debt for Americans runs $6,198 in 2022. If that amount carries the same 17% APR, the charge rather than a simple $1.41 monthly upcharge increases $87.39 each month.
   What this means is that each month you are paying your required monthly payment to the credit card company for your bill of $6,198 plus $87.39 additionally simply for having a balance.
   A final note here is that APR can also raise significantly if you have a lower credit score. Some cards can go upwards of 25% APR depending on the borrower’s financial history.
5. What is an annual fee?
   An annual fee is another confusing concept for many people. Many cards do carry an annual fee which is simply a one-time, yearly charge for the privilege of having the card. Some cards allow the yearly fee to be spread out over monthly increments as well.
   This fee also varies greatly depending on which card you get and what they provide. Many cards provide no annual fee at all like the Discover It cash back card. Some cards have fees that start at $95 a year like the Citi Premier Card and can go as high $695 with the Platinum Card from American Express.
   Understanding why certain cards have fees, do not have fees, and what the benefits of the cards are will be discussed in the next installment of this article.
6. What is a signing bonus?
   A signing bonus is simply a way for the credit card company to entice new customers to seek their specific credit card and sign up.
   Signing bonus’ are clearly attractive to the consumer and come in several different options depending on the credit card. Many credit cards will provide either cash back or bonus points for a signup bonus. Typically, if the card is associated with a bank, the bonus will be cash back. The cash back bonus can range with many like the Bank of America Customized Cash Rewards card offering $200 to the Ink Business Unlimited Credit Card giving $900.
   In addition to cash back and bonus points, certain cards offer airline miles as their bonus. These cards are typically “travel cards” meaning they offer reward benefits directly connected to travel.
   The one item to make sure you remember, when looking at a signup bonus, is that the cards typically have guidelines that need to be met in order to qualify for the bonus. The guidelines are different depending on the card, but usually require the card holder to spend a certain amount of money within a given time period after receiving the card.
   For instance, the Capital One Quicksilver Cash Rewards card offers a one time $200 cash bonus if $500 dollars is spent in the first 3 months of opening the card. If you spend less than the $500 dollars in that 3 months, you will not get the $200 bonus.
7. What is cashback?
   Cashback is, arguably, the best part of having a credit card. Yes, credit cards are convenient and secure, but the benefit of making money off the money you are spending is incredible.
   The idea of cashback started in 1986 when Discover first introduced it. Since then, people have been able to receive a small portion of what they spend through the year on select purchases back to their account in cash.
   Cashback percentage options range from card to card and category to category. Understanding what you specifically spend money on is helpful when looking at cashback options. For example, some cards do a blanket cashback percentage on all spending through the year. Other cards change their rewards for different categories including gas and groceries.
8. Comparison of cashback and travel perks/points?
9. What are rotating categories?
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10. If I do not pay my credit card back in full right away, what are the consequences?
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11. How do credit card companies make money on credit cards?
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Comparison of different credit card options and how to decide if they are for you