How Credit Cards Work

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Credit cards can help strengthen credit, while earning rewards for everyday purchases.

They also give you the flexibility to pay back purchases over time. Credit cards are a kind of loan, though, so it’s important you understand how they work.

Borrowed Money

Think of a credit card as a loan. Your card issuer has approved you for a loan amount (your credit limit) that you can spend. Each month, you’re committed to paying some of that loan back (your minimum monthly payment). Whenever you don’t pay it off in full, you’ll be charged interest on the remaining balance, and the interest will be added to what you owe.

So when choosing a card, it’s important to think about how you plan to use it. If you’re confident you’ll pay off the balance in full each month, interest rate may be less of a factor when selecting a card. If you think you’ll make some big purchases that will take a while to pay off, you definitely want to go with a lower interest rate to keep your balance as low as possible.

Building Credit

You can also use your credit card to build a positive credit history. Here’s how:

Use your card regularly
Make your payments on time
Keep your balance below your limit
Continue using your credit card over an extended period of time
Regularly read your credit report to make sure it’s error-free

Earning Rewards

Many credit cards reward you with a set amount of cash back or points for every dollar you spend. Points can be redeemed for cash, travel, merchandise or gift cards. If you use your card at our online Member Deals, you’ll even have the chance to multiply the rewards you earn while shopping at your favorite retailers.¹

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Navy Federal Credit Union logo.

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NARRATOR: Navy Federal Credit Union. Credit cards. Types of credit cards.

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Graphic image of several credit cards in different colors.

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When it comes to credit cards, you have lots of options. Here's a quick look at the types of cards that are available. If you're going to carry a balance, you'll want one with a low interest rate. But if you'll pay off your balance each month, the rate will be less important.

Let's talk about some other types of credit cards.

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Many retailers, like department stores and gas stations, offer their own credit cards. They aren't usually issued by a financial institution. And they may be easier to qualify.

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Just be aware, that although they can help you build credit, they can have high interest rates.

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Rewards cards will give you cash back or points based on your purchases. You can redeem your points for cash, travel, gift cards or merchandise.

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Graphic image of a premium credit card. Bubbles pop up from it with images of an airplane, tickets, and a hotel.

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If you're willing to pay an annual fee, premium cards offer additional perks, like priority airline boarding, early access to concert tickets and hotel upgrades. But you'll pay at least $50 or more a year.

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The credit score gauge dial falls from nearly 780 to below 500.

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What if you don't have much credit or you're rebuilding your credit? Consider a secured credit card.

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You deposit money into an account as collateral, like a security deposit. For example, if you put $250 into a deposit account, you can make $250 in purchases. Some secured cards even earn rewards.

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Whatever your lifestyle, there's a credit card for you.

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Our members are the mission. For more information, visit makingcents.navyfederal.org.

This is not a commitment to lend, and conditional/subject to the verification and accuracy of the information submitted to Navy Federal. This video is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation. NFCU copyright 2020. Federally insured by NCUA.

Learn more about how to use credit cards effectively on MakingCents.

Disclosures

Rewards are subject to change and vary by merchant. Reward types are based on the purchasing credit card. cashRewards receives cash back, Platinum receives a statement credit, and all others receive points. Program excludes Navy Federal business and Home Equity Line Visa Platinum credit cards and Navy Federal Debit Cards.

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