Credit Cards Explained Stinger

Disclaimer: For informational purposes only. It is not financial advice, nor is it intended to replace financial advice.

Credit cards are financial tools that allow users to borrow money from an issuing bank to make purchases. Unlike debit cards, which draw from a checking account, credit cards act as micro-loans that must be repaid.

The Credit System and Card Types

Transactions involve a complex digital conversation between the cardholder, merchant, acquiring bank, credit card network (like Visa or Mastercard), and the issuing bank.

• Unsecured Cards: Most common; granted based on credit history and income.

• Secured Cards: Require a cash deposit; used primarily to build or repair credit.

Understanding Credit Scores

A FICO® Score (300–850) acts as a financial "report card." Key factors include:

• Payment History (35%): Timely payments are the most critical factor.

• Credit Utilization (30%): The ratio of debt to available limit; keeping this below 30% is recommended.

• Length of History (15%), Credit Mix (10%), and New Credit (10%).

The Danger of Compound Interest

Carrying a balance triggers compound interest, where you pay interest on both the principal and accumulated interest. This causes debt to grow exponentially according to the formula:

Where A is the total amount, P is the principal, r is the APR, n is the compounding frequency (usually 365 days), and t is time in years.

Rewards and Responsibility

Issuers offer cash back, points, or miles to encourage usage. However, rewards are rebates, not income; "chasing points" often leads to overspending. To use credit responsibly:

• Treat the card like a debit card and pay the balance in full monthly.

• Avoid closing old accounts to maintain history length and lower utilization.

• Monitor statements regularly for fraud and budget tracking.

For more information and the list of sources, visit our full-length post here: Credit Cards Explained

Editor's Note: This article was AI assisted and subsequently reviewed, edited, and approved for publication by a human editor to ensure accuracy and quality. One or more of the images were generated using Google Gemini.