cards provide you with a revolving loan—or credit limit—based on
your agreement to pay at least the minimum amount due on the amount of
credit you use by the payment date. A finance charge is applied to the
outstanding balance—the amount you do not pay by the due date. For
example, if you purchase $200 in one month and you pay the minimum
amount due of $15, you will pay a finance charge on the outstanding
balance the next month. The American Express Credit Card for Students
(the blue Card) is an example of a credit card.
You can avoid paying finance charges by paying your balance in
full—that is, paying off the outstanding revolving loan balance.
However, revolving credit cards give you the flexibility of making
minimum payments when that is most convenient for you. The cost of this
convenience is the finance charge.
Typically, credit cards have a revolving credit limit. That means that
as soon as you pay for credit you have used, it becomes available again.
For example, if you had a credit limit of $500, then spent $100, your
available credit would be $400 until you repaid the outstanding $100,
when your available credit would be $500 again.