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Why They’re Called Credit Cards

Short-term loan

Credit cards provide a way for you to take out a short-term loan. Each time you use your card, your credit card provider is paying the money up front with the expectation that you will repay it on a monthly basis.

You can avoid spending more money than you have by paying your balance in full at the end of each month. If you don’t pay the full balance at the end of a month, your credit card company will charge interest on your loan. You’ll still have to pay the amount due plus the added interest next month.

To get a credit card, you must complete an application that asks for information about:

  • You
  • Your income
  • Your expenses

The information in your application and in your credit report help lenders determine how much of a risk it would be to lend you money. If the lender approves you, you receive a limited line of credit.

Your credit card becomes part of your credit history. Credit bureaus collect information about how you handle your credit, and make that information available to lenders, landlords, insurers, and even to potential employers.

If you do not always make your credit card payment on time, future lenders may not approve loans for you. Even if future lenders approve your loan applications, they’ll charge you more interest to cover their perceived risk.

When should you get a credit card or take out a loan? Think over this decision carefully,  decide when you have enough income and enough will power to handle a credit card wisely.

Copyright 2012 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.

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