Ah the credit card. When you think about it ideas of platinum and gold cards and the high life may come to mind. This is part of the story. The other part of the story is that using a credit card irresponsibly can burden a person with an enormous amount of debt and keep him up late at night. So what is a credit card and how does it function?
You have probably seen commercials about “improving your credit score” or companies that will “give you your credit score” now you may be thinking “What the hell is a credit score?” Put simply a credit score is a three digit number that indicates how reliable you are as a borrower. Why does that matter? When you apply for a loan at a bank the bank has to evaluate whether to loan you the money and what interest rate to charge you. If only there were a way for a bank to see how you have paid other loans and whether you default (don’t pay) on a lot of loans. Surprise! There is a way and it is called credit-scoring systems. So before we delve deeper remember that the better your credit history and thus your credit score, the easier it is to obtain a loan and the lower the interest rate you will be charged. Also remember that debit card payments and cash payments are not relevant here. Only credit financing (credit cards, loans, etc.) affects your credit score and credit report.