Get a better understanding of how credit cards work, including how to manage credit cards, in this free lesson.
What is credit?
Credit is a contractual agreement that allows you to receive a loan and pay it back later. There are three types of credit accounts:
- Credit cards
Banks, gas and oil companies, and department stores typically issue credit cards based on a revolving credit agreement. That means you can either pay the full amount due each month or make a minimum payment—an amount less than what you owe.
- Charge cards
With charge cards and charge accounts, you promise to pay the balance in full each month. There are no limits and no interest payments on a charge card as long as you pay the balance each month, but you will be charged expensive interest fees if you do not pay on time.
- Installment loans
Automobiles, furniture, and major appliances are often financed via an installment agreement. You agree to pay back a fixed amount in equal payments over a certain period of time, usually along with interest.