Revolving credit

With revolving credit, you are given a maximum credit limit, and you can make charges up to that limit. Each month, you carry a balance (or revolve the debt) and make a payment. Most credit cards are a form of revolving credit.

Charge cards

While they often look like revolving credit cards and are used in the same way, charge accounts differ in that you must pay the total balance every month.

Service credit

Your agreements with service providers are all credit arrangements. You receive electricity, cellular phone service, gym membership, etc., with the agreement that you will pay for them each month. Not all service accounts are reported in your credit history.

Installment credit

With installment credit, a creditor loans you a specific amount of money, and you agree to repay the money and interest in regular installments of a fixed amount over a set period of time. Car loans and mortgages are two examples of installment credit.

A credit card can be convenient and helpful. Used wisely, it can help you become conscious of what you spend. It can help you establish a credit rating, and demonstrate a record of sound financial planning. Used unwisely, the amount of money that you spend on credit can add up quickly and leave you in financial troubles that are hard to surmount. A little knowledge about how credit cards work can prevent you from falling into a credit crisis, or can help you out if you are already in one. Most credit card companies calculate your payment due by using an average daily balance. This number is determined by adding each day's balance, or amount that you owe to date from purchases, and then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by your card's monthly periodic rate, which is calculated by dividing the annual percentage rate (APR) by 12. A card with an annual percentage rate, or yearly rate of interest that includes fees and costs paid to acquire the loan, of 18 percent would have a monthly periodic rate of 1.5 percent. If that card had a $500 average daily balance it would yield a monthly finance charge of $7.50. Many credit card companies do not require you to pay off all of your balance at the end of each month. Rather they will require a minimum payment for you, which is typically two percent of your account balance. Paying off minimum monthly balances will not get you very far in paying off your credit. In most cases, you will be simply paying off a portion of the interest that you owe, and not even touching your principle-or the money that you actually spent on your purchase.

So what does this mean to you?

Paying only the minimum payment will leave you in debt for a long time. Credit card companies know this, and they make a great deal of their money on people who only make minimum payments. The amount of money that you can save by paying off your credit cards can be enormous. There are many resources available on the Internet to help you calculate what you owe, and to help you set up a schedule for effectively, and efficiently paying off your debt. Many of these sites also provide information on how credit cards and loans work, and where you can go to find help if you need it.

Knowing your credit score before you apply for a credit card is important, because particular credit cards are developed for consumers who fall within a particular credit score range. Here are the five generally accepted credit score ranges.

What this means is that someone with a credit score of 640 shouldn't be applying for credit cards meant for people with excellent credit, because he or she will likely be denied, and if you apply for too many credit cards at the same time, your credit score could suffer. Back to top.

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In order to effectively compare credit cards you'll want to use a tool, like the credit card comparison tool on Credit.com, but you'll also need to know what to look for. There are a couple of key indicators.

APR -

This stands for Annual Percentage Rate and it represents how much you'll be charged for carrying a balance on your credit card. If you carry a balance of $100 for a year, and your interest rate is 10%, then you'll be charged $10. These rates vary based on your credit score. The better your score, the lower your rate is likely to be.

Fees -

Credit cards may have a number of types of fees associated with them. Annual fees, late fees, over-limit fees and loyalty fees are just a few. You'll want to make sure you understand which fees, if any, apply

Rewards -

There are lots of kinds of rewards credit cards available - cash-back rewards, mileage rewards, travel rewards and more. It's important to play close attention to the terms of the rewards programs, so you can compare them accurately.