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What Is A Credit Card?

By Dan Green

Credit cards are cash-substitutes used to buy things. When you use a credit card, you’re instructing your credit card company to make a payment to a merchant on your behalf, like “running a tab”. Credit card companies do this at no cost so long as you repay them within about a month. Money not repaid is subject to interest.

Who Uses Credit Cards?

There are more than 1.5 billion credit cards in circulation. The typical consumer has at least one credit card. Many have three or more.

There are lots of reasons why you may want one, too.

There are also other reasons you might want a credit card.

First, when you use a credit card and make payments each month, it forces the credit card companies to report your history of payments which, in turn, boosts up your credit score.

Good credit scores  are good for your budget.

Through decades of studying their customers, companies that do auto insurance and home security, for example, have learned that customers with high credit scores are better for business.

As a result, customers with high credit scores tend to get the “best deal”.

One home security company, for example, gives a $100 discount to homeowners with good credit scores; and, auto insurance companies are known to give their cheapest auto insurance rates to customers with high scores.

You can’t boost your credit rating by using a debit card.

Another reason people like credit cards is because using credit cards can get you free stuff.

Credit card companies offer perks to their customers — such as free airline tickets, big hotel discounts, and actual cash-back — so long as you make purchases on their cards.

If your credit card offers 5% cash back, for every $100 you spend, that’s $5. This money is yours for no reason other than you chose to use your credit card instead of cash.

Free stuff is good.

See which credit cards offer cash back rewards here.

How Credit Cards Work

Credit cards are an important part of how we live today. You can’t use cash to buy on Amazon; and Netflix won’t take those gift cards you have laying around.

Credit cards make it easy for us to buy online.

They also offer excellent rewards, which can make them a better option as compared to paying with cash or using a debit card .

Some of the reasons why credit cards are better than cash:

How credit cards work is pretty straightforward.

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1. You give your credit card number to the merchant

When you get a credit card from a bank, it comes with a unique account number, which is like a username. The number is physically printed on the card; and stored on in a magnetic strip, in a digital chip, or both.

There are three ways by which shoppers can give their credit card number to a merchant.

The first is when you have your card with you in your wallet, like when you’re shopping at a store or eating at a restaurant.

To make payment in a brick-and-mortar store, you give your credit card to the merchant who swipes it through a machine reader. The “swipe” reads the number off your credit card.

The second is when you use the payment system included with your phone. This includes the Apple Pay , Android Pay , and Samsung Pay systems.

To give your credit card number using your phone, wave your device over the special receiver provided by the merchant, your credit card number is transmitted to the machine.

The third way to give your credit card number is when you do it online.

As part of the “check-out” steps on a website, you type your credit card number into a form, which sends your number to the website owner electronically.  This is how Amazon and Etsy work, as examples.

2. Your credit card number is processed for payment

Once a merchant has your credit card number, it submits your payment for approval.

The credit card approval process is comprised of two parts — a security check and a verification that you’re within your credit limit .

The security check looks for indications of fraud, like use of a fake credit card number or something like that. And, the credit limit check makes sure you have money available to spend.

When the merchant gets approval for your purchase, the transaction completes.

The credit card approval process is instantaneous.

Compare credit card offers here.

3. You repay your “tab” with the credit card company

Once monthly, your credit card bill comes due. Your bill is a tally of the items you’ve put on your tab, which must be repaid to your credit card company.

There are three ways to pay your credit card bill. You can pay your bill online, pay using auto-withdrawal from your bank, or pay by writing a paper check.

You’ll definitely want to make your payments on-time. There are two reasons why.

The first reason to repay your credit cards on time is that interest gets charged on whatever isn’t repaid, and interest can get expensive. The second reason is because of rewards.

Credit cards won’t usually give you cash-back or travel points for money you don’t repay.

How To Get A Credit Card

To get a credit card, you must apply for one. The process is quick and you can have a new card in-hand by tomorrow.

You’ll want to determine what’s most important to you.

Your application will ask for your name, your address, your social security number, and your employment status. If you are a student, your job title should be listed as “Student”.

Then, submit your application and wait for an approval. Processing can complete in as few as 30 seconds and you can have your card in-hand via FedEx or UPS the next day.

Click to review dozens of credit card offers.

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Written by Dan Green

Dan Green is a mortgage lending expert and the founder of Growella. Prior to Growella, Dan was a six-time, top-producing loan officer; and, ranked repeatedly among the top 1% of loan officers nationwide. Dan's home buying expertise has been in print and on TV with The Wall Street Journal, NPR, Forbes, CNBC, and others.

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