Credit cards are a form of unsecured debt. A person qualifies for a credit card by filling out an application, listing his Social Security number, his income and employment,and other personal details. His credit limit (the amount of money he is allowed to borrow) and the interest rate (the amount he will be charged for borrowing the money) is based on his credit score and his income.
Definition of unsecured debt
Credit cards are considered unsecured debt because when you borrow the money, there is no collateral. When you buy a house or a car, for example, that is considered to be secured debt. If you do not make the payments the bank or the company that lent you the money can come and take your house or take your car. But you can use credit cards to buy whatever you want: groceries or toys or charge a plane ticket. If you do not pay your debt, the company can't come and take back a used plane ticket or groceries you have eaten. So the debt is not secured by anything. Unsecured debt, like credit card debt, usually has a higher interest rate.
What does interest rate mean?
The interest rate on your credit cards is the amount of money you are charged for using your credit. Most credit card interest rates are stated in terms of annual interest rate. So, for example, you could sign up for a credit card that has a 10 percent interest rate. That would mean that, over the course of the year, you pay 10 percent of the total amount of money you borrowed. Figuring out how much interest you actually pay can be somewhat tricky, though, because different credit card companies calculate interest differently. Some credit card companies calculate interest based on your average daily balance while others calculate interest based on monthly cycles or use a two-month cycle to calculate interest. If you have any questions regarding how your interest will be calculated, it is best to ask the creditor prior to filling out an application.
What does credit line mean?
The amount of money you have available to borrow is called your credit line. For example, if you have a $500 limit, that means you can borrow up to $500 at a time on that credit card. If you borrow the full $500 you are said to have "maxed out" your credit line or borrowed the maximum amount available. This behavior tends to lower your credit score. If you exceed your credit line or go "over the limit" you are usually charged a fee or a penalty.
What does minimum payment mean?
Your minimum payment is calculated based on the amount of money you owe. It is the minimum amount of money you have to pay on your credit card each month, in order to keep your credit card "current." If you fail to pay the minimum amount due by the due date, the credit card companies report that as a late payment on your credit report. You may also be charged a penalty, and the interest rate on your credit card might go up as a result of the late payment. The minimum payment is usually less than what you owe on your credit card, and in some cases does not even cover the monthly interest. If you pay only the minimums on your credit card, your debt can continue to grow larger despite the fact that you are making payments, and it may take you many years to pay off your credit balance in full.
What is my credit score?
Your credit score is determined by your use of credit cards (in part) and also determines your access to credit cards. Each time you borrow money the transaction and the resulting payments and interactions with the credit card company are reported to one (or more) credit bureaus. They keep a record of your credit history, and assign you a FICO score. 35 percent of your FICO score is based on your history of paying credit (including credit cards) responsibly and avoiding bankruptcy and judgments. 30 percent of your FICO score is based on how much you owe, and how close to your balance you are. 15 percent is based on the length of your credit history (longer is better). 10 percent is based on the amount of new credit you apply for (again, less is better). And 10% is based on the different types of credit you use (if you just have unsecured debt, your score will be lower than if you have a mix of secured and unsecured debt).
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