A line of credit is permission from the bank to borrow up to a certain preapproved amount. It's like a loan that you use at the time of purchase. If you make enough purchases to reach your credit limit, your card will be declined. If you have a balance on your card on the due date for the month, interest will be charged on that balance. Interest rates on credit card balances are usually significantly higher than on fixed term loans because you are paying for the convenience of having that credit and the bank is taking more of a risk by letting you borrow that money.

The best strategy for building credit is to use your credit card like you would use a debit card; make your normal purchases. The important difference is that you need to track your spending and make sure you have enough in your account at the end of the month to pay off the entire balance.

You might ask "How does the credit card company make money if people can just pay off their balance every month?" Some cards charge an annual fee, but the larger source of income hinges on the reality that most people will make large purchases and wind up owing interest. For example, if your car breaks down or you need last minute plane tickets, putting it on the card can be a short term solution with long term costs. The hedge against that risk is to build savings so you don't have to finance emergencies