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Understand credit card types to know what's right for you

Credit cards can be a convenient financial tool for students—but it's important to understand that using them means you're really taking out a loan.

A credit card lets you borrow money that you can use now and pay back over time. How and when you pay the money back is a key to good financial management. There are 3 basic types of credit cards:

General-purpose credit cards

These are credit cards that can be used to pay for just about anything, anywhere—from clothes at department stores to meals at restaurants. You can even get a cash advance with this type of card. Visa®, MasterCard®, American Express® and Discover® cards are examples of general-purpose cards.

General-purpose cards allow you to track all your purchases and/or expenses on a single bill. Unlike charge cards, these cards allow you to revolve your charges—in other words, to carry over portions of your balance from month to month. If you don't pay off your balance in full from one month to the next, interest is charged on the entire outstanding balance.

Store cards

Store cards, also known as single or limited-purpose cards, are credit cards that can be used only in a specific store or group of stores or for a specific purpose. Department store cards like JC Penney and Macy's and clothing store cards like Gap and Old Navy are examples of store cards.

It's important to read the fine print of your credit card agreement: The interest rate on store cards can often be significantly higher than with general-purpose credit cards. While many stores offer a special interest rate or discount promotion when you open an account, the higher interest rate might mean the card isn't such a great deal for you after all.

Charge cards

Charge cards require you to pay for purchases or services in one lump sum within a given period of time. You usually don't pay interest, but you are required to pay the balance in full each month. Late payments are subject to a fee, charge restrictions or card cancellation depending on your card agreement. Charge cards may also be called travel and entertainment cards.

Interest

A fee charged for borrowing money. Also refers to money that a financial institution may pay individuals for keeping their money in an account there (such as an interest-bearing savings account).

Cash advance

A service provided to credit card holders to have the ability to access cash against their available credit on his or her card.

Credit cards for students

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