When used responsibly, credit cards are a great resource for establishing and building credit.

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) 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