What is a Credit Card?

A credit card: it’s a magical piece of plastic that lets you purchase items you don’t have the cash for. It’s not a debit card because you don’t need to have the purchasing power up front, but it’s also not “free money” because the debt has to be repaid.

A credit card is nothing more than a complicated piece of plastic: it has your name and account number stamped on it, a CVV2 number printed on the back, and a magnetic stripe (also known as a mag stripe) which contains a digitized version of your account information.

This complicated piece of plastic does nothing more than carry information about your credit account. It’s this account, however, that needs to be explained.

A credit account is a line of credit known as revolving credit: you have a certain amount of credit that you can use, and once you repay your debt you can use your credit again.

If you have $2,000 in credit and spend $500, you’ll have $1,500 left in credit with $500 in debt that must be repaid.

If you repay $100 of that debt you’ll have $400 in debt and $1,600 in credit.

So, the amount of credit decreases and increases and credit is used and debt is paid back (ok, that’s a very simple explanation, but it works for the purposes of this article!)

We call it “revolving credit” because, unlike traditional bank loans, credit cards do not have a fixed number of payments and can be paid back at irregular intervals (such as once a week), so long as the minimum monthly payment is met.

So what is a credit card? It’s a piece of plastic that gives you access to your credit account.

[tags]credit card, credit card debt[/tags]