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Learning Bank - Credit Cards

A credit card is an open-ended loan that allows you to borrow money up to a certain limit and carry over an unpaid balance from month to month. There is no fixed time to re-pay the loan as long as you make the minimum payment due each month.

pile of generic credit cards

A credit card company sets limits on how much you can charge on your card when it issues a card to you; this is called a credit limit. You can then use your credit card to make purchases up to your credit limit.

Credit cards are convenient to use to make purchases when you don't have access to cash, and they can help you build a positive credit history. The downside to credit cards is that when you use it, you're borrowing money, so you will be charged interest whenever you don't pay your account balance in full. Credit card interest rates depend on your credit history and can be high. The interest rate is charged to the account each month you carry a balance, and these interest charges can add up. You may also be charged extra fees if you pay your bill late.

How Much Does it Cost to Use a Credit Card?

Let's say you go to the mall and buy clothes, food at the food court, and an accessory for your phone, spending a total of $200, which you put on your credit card. Your credit card has an average interest rate of 18%, and your minimum monthly payment is $15. As you can see in the chart below, if you make just the minimum payment each month, it will take you 15 months to be rid of your debt and you will pay $24.80 in interest...so long as you stop adding purchases to your card. If you continue to use your card to buy things, your balance will increase, which will increase the time it will take you to pay off the balance and the amount of interest you pay.