Using credit1 is one way to borrow money. Credit cards may be used to draw on a line of credit to make purchases with the understanding that you will pay that money back later with interest and, sometimes, additional fees.
1. Establish a line of credit
Behind every credit card is a line of credit. A line of credit is an agreement between you and your financial institution that outlines the terms of your agreement to borrow money using your credit card. This includes your credit limit (how much you can borrow), your annual percentage rate (APR)2, and other fees.
2. Use your card to make purchases
Every time you make a purchase with a credit card you are borrowing money from your financial institution under the terms you agreed to when you opened your line of credit.
3. Make payments
If you charge purchases to your credit card, you will be required to make a regular, minimum payment to your account. Minimum payments are calculated by your financial institution as outlined in the terms of your credit agreement, usually as a percentage of your overall balance. Try to pay off your balance in full every month to avoid paying interest and fees.
4. Build your credit history
Payment history accounts for approximately 35% of your credit score, so one way to build your credit score is to always pay your bills on time and in full. Also, people who use less of their available credit are considered lower risk, and so receive a higher credit score. A general rule of thumb is to use only 30% or less of your available credit.