What Is A Credit Card?

A credit card allows the cardholder to charge purchases to a credit account at a bank or other financial institution. The bank pays the merchant on the cardholder's behalf. The cardholder then owes the credit card issuer (the financial institution) the full amount of the purchase.

The bank establishes a credit limit for the cardholder that controls his or her spending: the outstanding purchases on the credit card cannot exceed the credit limit. The limit is based on a number of factors, such as the cardholder's previous credit history, income, marital status and other factors. (Applicants with poor credit ratings can often only qualify for secured credit cards.)

Approximately once a month (the exact period varies — it can be as little as 20 days or as much as 45 days) the credit card issuer bills the cardholder for the purchases he or she made. The purchaser can pay off the entire amount and pay no interest. Otherwise, the unpaid balance remains in the credit account and the issuer charges interest until the cardholder repays the outstanding balance.

A charge card is similar to a credit card, except that the entire balance is due and must be repaid when billed. The original American Express card is the best example of a charge card, however most AmEx cards nowdays are conventional credit cards, not charge cards.