The basics of credit cards

Your coaches introduce the topic.
Michael
When you’re out shopping or paying the bills, how do you pay for things? Cash? Check? Debit card? Maybe sometimes you use a credit card.
Luis
Millions of people do. Lots of financial institutions offer credit cards and some will charge you an annual fee to have one. When you apply for a card, they’ll check your credit history and decide whether or not to give you a card. They’ll also decide how much you’re allowed to borrow, or “charge.” This is called your credit limit. If the credit card company issues you a card, they’ll let you know what your credit limit will be.

Illustration of the flow of money, depicting the consumer, credit card, store, financial institution, and money.

Michael
Once you have a card — take it from us — it’s very easy to use it. But if you’re going to use credit cards — and you want to use them to your advantage — it’s important to understand how they work. In this lesson, we’ll make sure that you do.
Luis
So let’s start with a few basics: credit cards can be more convenient than carrying cash, but remember, you always have to pay the money back. Every time you use your credit card, you’re actually borrowing money from the financial institution that issued you the card. The financial institution pays the debt to the store for what you bought. In turn, you pay the money back to the financial institution.
Michael
Credit cards are called revolving credit because as you pay the money back, your credit becomes available for you to use again and again.

For more information on credit card regulations, please visit federalreserve.gov/creditcard.

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