Credit Cards

The money you spend when you use a credit card isn't really yours — you're actually borrowing it from the bank or other financial institution that issues the credit card, in an arrangement called revolving credit. You have access to a fixed amount of money, called your credit limit. Once you repay any of the money you have spent, you can borrow that amount all over again.

What you borrow, or what you spend, is called principal. For the privilege of using the principal, you pay the credit card issuer a finance charge, which is the interest that accumulates on any unpaid balance. For example, if you have a balance of $600 on a card with an annual interest rate of 18%, your monthly finance charge will be $9. It's calculated by multiplying a month's worth of interest — 1.5% — times the balance.

Every credit card company has to disclose the interest rate it charges on the balance you carry, and different cards charge different rates so it's worth shopping around. Some list their monthly or daily interest rates, but you can compare different cards by looking for the annual percentage rate (APR), which all card issuers are required to disclose. A card's APR doesn't include any late fees, annual fees or other charges, so if you're comparing rates, be sure to take into account all additional fees. 

Secured credit cards

Another option you can consider is a secured credit card, which means that your card is attached to a savings account that is pledged to the bank that issues the card. You deposit a sum of money that you won't be able to touch, but you can charge up to that amount on your card. The deposit account is in your name, but if you don't pay your bills, the card's issuer can take what you owe out of your account. Secured cards may be a good choice if you've had credit problems, and are having trouble being approved for a credit card. If you regularly pay what's due on a secured card, you may be able to qualify for a regular, unsecured card after a certain period of time.