Learning about credit cards, and how to use them responsibly, is a great first step toward financial health. So, if you’re wondering, “How do credit cards work, anyway?” here’s a guide to get you up to speed.
A credit card is a small plastic card that lets you borrow money from a financial provider. If you borrow funds for a significant period of time, you’ll pay a fee for the privilege — called interest.
Use credit cards if you want a secure and convenient way to pay. They’re also excellent tools to build your credit score — a three-digit number that represents how reliably you’re expected to pay your debt.
Beware: A credit card isn’t free money, and you’re always expected to pay back whatever you borrow. There will also be a maximum you can borrow at a time.
Here’s the lowdown on how credit cards work. Once you understand the mechanics behind your card, you’re on your way to using it responsibly.
Swiping your credit card means that you’ll repay your bank later for your purchases. But when do you have to pay?
To find out, you need to know how long your bank’s billing cycle is. After each cycle, your bank will collect all the transactions you’ve made and send you a bill.
A billing cycle doesn’t necessarily line up with each month. It can start from the 1st to the 30th, but it could also start from the 25th of one month to the 25th of the next month, and so on.
To know for sure how long your billing cycle is, ask your card provider. You’ll also see how long the cycle is once you receive your bill.
When you receive your bill — called your credit card statement — it’s time to decide what to pay. To avoid paying unnecessary interest, it’s a good idea to pay your entire balance. But you can also choose to pay the minimum amount possible or some amount in between. The amount you pay will decide how much interest you owe.
You don’t have to wait for your bill to arrive before repaying your bank. If you’d like, you can pay off your balance immediately.
Many people shy away from credit cards because they’re worried about interest. Interest is money you pay to your bank as a fee for borrowing money or delaying payment on your purchases. In short, it’s a charge for the privilege of borrowing money.
However, you won’t owe interest if you pay your bill in full within a certain amount of time. Your card provider will typically give you a grace period to pay off your purchases. If you pay your entire balance within this period, you won’t be charged interest.
If you pay less than your full balance by the due date, your remaining balance will accumulate interest. At the very least, you need to repay the minimum payment, typically 1% to 3% of what you owe. Be careful about carrying a balance on your card, which could cause your credit card debt to snowball.
How long is a credit card grace period?
Credit card grace periods usually last between 21 and 25 days. Per the Credit CARD Act of 2009, a grace period must be at least 21 days if a provider offers one.
Card issuers don’t have to offer grace periods, but the vast majority do.
Many providers charge an annual fee to use their credit card — a fee you have to pay once a year to remain a cardholder. Annual fees can eat into rewards you might earn, so factor them in when looking for a card.
You may see an introductory annual fee for the first year. This means you’ll pay a discounted fee for the first year and then the stated annual fee every year thereafter.
Keep an eye out for other fees that could include:
A credit card offers revolving credit, which you can think of like a rechargeable battery.
Here’s an example: Let’s say your card has a $1,000 credit limit, and you make a $400 purchase. That means you have $1,000 less $400 — or $600 — in available credit. At this point, you can spend only $600 more on your card before you hit your limit.
However, let’s say you now pay $300 toward your balance. This raises your available credit to $900 ($600 plus $300). Now you can spend up to $900 on your card. In a sense, you’ve “recharged” your card’s spending power.
Credit cards are different from non-revolving credit sources, which don’t offer more credit after they’re paid off. Home loans and car loans are a few examples.
While browsing credit cards, you may run into the fabled charge card. With this type of card, you’re required to pay your balance in full each month.
Today, only a handful of card providers, such as Brex, offer charge cards to businesses.
Back to topIf your finances allow, try to pay your credit card early because you get to:
First, you need to set up a budget for making early credit card payments. Once you have that covered, here’s how to pay early:
As long as you make the minimum payment — between 1% and 3% of your balance — before the due date, you only accrue APR on purchases on your remaining balance until you pay it off.
But if you fail to make the minimum payment, you’re on the hook for a late fee and could incur a penalty APR of 30% or more, depending on the card provider. In addition, your credit score suffers.
With a credit card, you essentially borrow money that you’ll pay back to your bank later. Here’s how it differs from other types of payment cards:
There’s a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are some of the different card types you’ll find on the market.
A basic credit card comes with very basic features and few of the perks or rewards you might get with other cards. Common features may include low-interest rates or a $0 annual fee.
These are designed to help you save money over time if you have to carry a balance.
Some basic cards may carry this feature, though you’re more likely to find this on a dedicated balance transfer card.
Rewards cards provide bonuses for your everyday spending. They also often come with lucrative signup bonuses.
A credit repair card is relatively easy to get. It won’t offer top-notch rewards, but it does let you build or rebuild your credit slowly.
Here are a few important terms you should know while you look for a credit card. You can find many of these terms in your card’s Schumer Box.
You’ll typically see a credit card’s interest rate expressed as an APR, short for annual percentage rate. This makes it easier to compare interest rates between cards.
Some cards offer an introductory APR. An intro APR means you’ll receive a special APR for a specified period of time, after which your APR will increase. For example, you may get a 0% intro purchase APR for 12 months, after which your APR will revert to 20%. To avoid accruing interest, pay off your balances before the 12 months are up.
A fixed interest rate stays the same for the entire time you have your credit card. You won’t find many fixed-rate cards, because the Credit CARD Act of 2009 made it more difficult for card providers to change interest rates at will. Essentially, it became more difficult for providers to advertise fixed rates and hike APRs later.
You’re much more likely to find a card with a variable interest rate. This means your APR is typically pegged to the prime rate — the interest rate banks give to those they consider most creditworthy. Your provider will usually use the prime rate plus a certain percentage to determine your APR.
To figure out your interest rate, you can keep track of the prime rate published by The Wall Street Journal. Alternatively, periodically ask your card provider what your APR is.
You may also see something called deferred interest. This is interest you won’t have to pay if you pay off a purchase within a specified period of time.
The Best Buy Credit Card offers deferred interest on select items.
“Deferred interest” does not mean “zero interest.” If you don’t pay off your purchase in full within the specified time period, you’ll be charged interest starting from the day you swiped your card.
A credit card offers revolving credit, which you can think of like a rechargeable battery.
Here’s an example.
But this is where the magic of revolving credit comes in.
Credit cards are different from non-revolving credit sources, which don’t offer more credit after they’re paid off. Home loans and car loans are a few examples.
Pay attention to the fine print associated with these fees. Failure to do so is how many consumers fall into credit card “traps” and pay the price when it comes to credit health.
When you initiate a balance transfer, you move your existing credit card debt to a new card. Any debt you move will be subject to your new card’s balance transfer APR.
Some cards come with an introductory balance transfer rate. With this intro rate, you’ll get a lower APR on your transfer for a specified amount of time, after which your APR reverts to the usual balance transfer rate. To avoid accruing interest, pay off your balances before your intro APR expires.
Balance transfers usually come with fees — typically a flat rate or a percentage of each transfer, whichever is the higher fee. Also, they might not be subject to the grace periods you get with purchases.
When you get a cash advance, you use your credit card to take out cash. For example, you might use your card at an ATM. Purchases like gambling chips, gift cards or traveler’s checks may be classified as cash advances.
It’s a good idea to avoid cash advances because they tend to attract high APRs and fees. Also, they often don’t come with grace periods for interest.
Your credit utilization ratio is how much you owe on your credit cards compared with your total credit limits.
For example:
Your credit utilization factors heavily into your credit score. It’s a good idea to keep it below 30% at all times.
A credit card is offered by a bank — Bank of America, for example. But if that’s so, why does your card include a logo for Visa or Mastercard?
It’s because credit cards are supported by both issuers and networks.
Your issuer is the one you’ll make payments to and call if you have problems with your card. You’ll probably contact your card network more infrequently — for example, when you want to take advantage of benefits such as Visa Concierge or Mastercard roadside assistance.
Read our guide to learn more about credit card issuers and networks.
When you apply for credit from a lender — for a mortgage, car loan or credit card — your credit score matters. Your credit score is a numeric measure of how trustworthy you are as a borrower.
Lenders check your credit score to gauge their chances of being repaid. Here’s a simple rule of thumb: The higher your credit score, the more likely you’ll be approved for a credit card. Many organizations calculate credit scores, but the go-to source is a company called FICO.
Use recommended credit scores for cards to help you determine which credit card best fits your financial situation. A few important factors that affect your credit score and your approval odds are:
When you apply for a credit card, your provider will check your credit in a hard pull. This will typically lower your credit score by a few points. But this is usually not too much to worry about, as you can regain those points within a relatively short period of time.
Having a credit card can impact your credit score in bigger ways. Two of the most important factors here are your record of making card payments on time and how much debt you carry on your cards.
The lowest FICO score is 300, while the highest is 850. The higher your score, the more trustworthy a borrower you appear to a lender.
Depending on your score, you’re said to have excellent, good, fair or poor credit:
You’ll qualify for different credit cards depending on your credit score.
These types of products are excellent picks for a first-time credit card:
It’s natural to be nervous to apply for a credit card. The truth is, there are advantages to getting a card as well as situations in which you shouldn’t get one. Here are a few arguments for both, but you can check out our full guide on when to apply if you need more help.
Here are a few reasons it might be advantageous to get a credit card:
Consider holding off on a credit card if you:
Owning a credit card isn’t always free. There are several costs to watch out for, from the well-advertised to the non-obvious.
Negotiating with your card provider for a lower APR can result in a big financial win for you. Plus, there isn’t really a downside to making the request, as the worst that can happen is you’ll get a “No.”
Here are a few tips to help you navigate your negotiation smoothly.
Your credit score is important because it affects whether your card provider sees you as a responsible borrower. The higher your credit score, the better chances you have of getting your APR lowered.
There are many services that let you check your FICO score. Some, such as Discover Scorecard, let you check your score for free. Some credit card providers include your FICO score on your card statements.
If your credit score is below 670, you may want to work on it before asking for a rate decrease. The two main ways to increase your score are making on-time debt payments over a long period and keeping your credit utilization low<.>Find credit card offers from other providers
You can get prequalified for credit cards from certain providers without affecting your credit score. If you’re getting credit card offers in the mail, save them.
Getting credit card offers means you fit the credit profile of someone who would likely be approved. It also means you have other options if you become unhappy with your current provider. Simply mention to your provider that you’ve received these offers, which will help you negotiate a rate decrease.
Before you call your provider, prepare a few talking points. In addition to having a strong credit score and getting prequalified for other cards, here are a few other factors that can help your case:
Ultimately, getting your APR lowered is often as simple as calling your provider, saying you’re seeking a rate decrease and explaining why you should get one.
When you call your provider, it helps to be kind to the representative — they may be more willing to do you a favor simply because you’re polite.
If the representative says no, consider asking to speak with a manager, who may have more authority to help you. Alternatively, call back and try your luck with another representative who might be more lenient.
With so many credit cards on the market, there’s no “perfect” card. Here are a few factors to compare to help you decide.
Consider whether you’re willing to pay an annual fee for your card. If you’re not, there are plenty of no-annual-fee products to choose from.
Also, consider the things you’re likely to do with your card, and avoid the corresponding fees. For example, if you’ll use your card internationally, look for a product with no foreign transaction fees.
If you’ll initiate a balance transfer on your card, you might like a product that waives transfer fees.
Before applying for a card, check its pricing and terms. There, you’ll find the interest rates you’ll pay for various transaction types. The APR is especially important if you plan on carrying a balance from month to month.
Check if the card’s bonus rewards match with your typical spending. If you’re a foodie, for example, you might like a card that offers accelerated rewards on dining purchases.
If your supermarket bills are substantial, look for a card with the best rewards on groceries.
If you spend relatively evenly across many categories, you might like a card with flat-rate rewards.
Particularly if your card has an annual fee, there will likely be benefits you can enjoy. The best travel cards often have perks like travel credits, airport lounge access and hotel status upgrades.
It’s best to get a credit card only if you have your finances in order. If you have structural financial problems like chronic overspending, a credit card won’t help — instead, it could make things worse.
It’s easy to rack up large balances on credit cards, especially because most cards don’t require you to pay your bill in full each month. Paying the minimum each month is a particularly good way to find yourself deep in debt.
Beyond considering whether you can spend responsibly, think about how a card can help you reach your financial goals. Maybe you need to make a big purchase and pay it off over time. In that case, a 0% APR card could be a better choice. If you need to escape from high interest rates on your current card, you could apply for a balance transfer card.
Your credit history will largely determine which credit cards you’ll qualify for. The higher your credit score, the more choices you’ll have.
If you have a good or excellent credit score of 680 or higher, you could qualify for rewards cards, often considered the best credit cards available.
It will be tougher to get a credit card with fair credit, but you do have options. However, it’s unlikely that you’ll get a card that offers rewards.
If you have poor credit, most cards will be out of reach. Consider using a credit-building secured credit card.
If you’re young, you probably don’t have much of a credit history. Consider starting with a student credit card or secured credit card. Both cards can help you learn how to use credit responsibly.
The older you are, the more likely you are to have a credit history. Check your credit score and apply for the cards that you have a good chance of being approved for.
Here’s more information on credit cards for teens under 18 years old.
Income is a significant factor when a card provider decides whether to approve you. The reason is simple: Your provider wants to know you have the ability to repay your debt. All else being equal, the higher your income, the more likely your provider is to approve you.
You don’t necessarily have to be employed to get a credit card. As long as you have some source of income, you’re eligible.
Find a card that complements your interests. For example, if you like staying at a certain hotel chain, get a card that rewards you for spending money there.
You’ll also find brand-specific cards. If you like football, for example, you could get the NFL Extra Points Credit Card. Wherever you like to spend money — whether it’s Disneyland, Hot Topic, Costco or Southwest Airlines — see if there’s a card that fits your interests.
When you apply for a credit card, your card provider may need copies of your latest pay stubs to verify your income. They may also ask for documents to verify your identity.
While most providers require you to apply for a credit card in your own name, some will let you apply for a joint account with a partner. If you want to give others access to your account, add them as authorized users.
You can apply for a credit card online using the following steps.
Some banks will let you check for preapproval when applying for cards. To check for preapproval, you’ll need to submit a few details such as your Social Security number.
Besides letting you know whether you’re likely to be approved for a card, preapproval doesn’t result in a hard pull on your credit score. These “soft pulls” can prevent the standard dips in your credit score caused by a standard credit card application.
Applying online has many benefits — it’s fast, convenient and you can do it from the comfort of your home. But if you feel like applying online is a complicated process, you have other options:
In some cases, you’ll receive immediate approval. If your provider needs to review your application, wait two weeks to hear back. If you still haven’t heard from your bank after that time, contact a representative and ask about your application.
Upon approval, look for your card in the mail within seven to 10 business days. Then follow the enclosed instructions to activate your card.
Congratulations — you’re ready to start using your first credit card!
Understanding the different reasons your credit card application may be rejected can help you figure out your next steps. Having bad credit isn’t always the cause for a credit card rejection. Some of the most common problems include:
It’s important to remember that credit card issuers assess applications on an individual basis, so the specific reasons your application may be declined will vary depending on the circumstances. Some issuers may be willing to discuss these details with you through a reconsideration line but others may not. Either way, it’s a good idea to keep a copy of your application and go over all the details above to figure out why it was declined.
A statement credit is money your provider pays to your credit card. It essentially works the same as a cash payment to your account.
For example, if you have a credit card balance of $1,000 and you receive a $100 statement credit, you’ll then owe only $900.
When your provider applies a statement credit to your account, you’ll see it in the transaction history in your online account. You’ll also see it on your monthly credit card statement.
There are different ways you receive statement credit. The three major methods are rewards redemption, reimbursement for travel purchases and credits for item returns.
Typically, you’ll have a few ways to redeem your cash back, points or miles. You might be able to trade your cash back for a nice deposit into your bank account, or use the points for something like a hotel getaway.
Sometimes, you can redeem your rewards in the form of statement credit. For example, you might normally trade your cash back for a bank deposit, then pay off your credit card with that money. Instead, simply redeem your cash back as statement credit and lower your card balance directly.
Points or miles can work the same way. Instead of redeeming them for travel, you may be able to use them for statement credits. But remember this might not always be optimal, because your rewards might be worth lower than they would if you used them for other redemptions.
The standard value for points or miles is 1 cent each. For example, if you have 50,000 points, they should be good for a redemption worth $500.
However, if you redeem these points for statement credit, they might be worth a lower value — $300, perhaps. This gives you a value of 0.6 cents each, which is a poor deal.
The lesson: Always calculate the potential value of your points or miles before redeeming them. Do this by dividing the value of the redemption by how many points or miles you must use. So, a $300 flight that costs 25,000 points yields a $300/25,000 = 1.2 cent-per-point redemption rate.
There are a variety of cards that offer statement credits for travel purchases. Here are a few examples of statement credits you might find:
A provider may offer reimbursement for a specific purchase. Here’s a common example: Pay for your Global Entry/TSA PreCheck application fee with an eligible card, then get reimbursed later.
If you buy an item with your credit card and later return it, you’ll usually receive your refund to that same card. Your initial purchase resulted in an increase to your card balance — with a return, your balance will decrease.
Keep in mind you could still accrue interest on a purchase even after you’ve initiated your refund. That’s because refunds can take up to seven days to fully process.
There’s no penalty for keeping a credit card for a long period of time, even if you aren’t actively using the credit card. In fact, closing a credit card you own can do more to hurt your credit score than help. Even an unused credit card contributes to your credit utilization – getting rid of that unused card can result in a sudden boost to your utilization score.
With that said, there are a few reasons you might want to cancel an existing credit card:
It’s a great feeling when you finally get your first credit card. When you do, resolve to build good financial habits.
Keep your spending in check, pay off your balance in full each month and avoid some other credit card mistakes. These are the keys to using a credit card like a pro, building your credit score and opening new financial opportunities.
If you still have questions about credit cards, reach out to us using the form at the bottom of this page. A member of our team will be in touch.
What are the best credit cards?
We’ve assembled a list of what we consider the best credit cards for you to review.
Do I have to pay an annual fee for a credit card?
No, you can find many no-annual-fee credit cards to compare. Note that these cards typically don’t offer the powerful rewards you’ll get from cards with annual fees.
How long does it take to be approved for a credit card?
Many providers offer instant conditional approval online. If a provider needs to consider your application further, it may take up to two weeks to receive a response.
Can you have two credit cards from the same bank?
Yes. Most banks will let you apply for more than one credit card, though some restrictions can apply.
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How do I top up my credit card ?
Hello Dave,
Thank you for your comment.
Please note that a credit card does not have money on it that you pre-pay. It connects to a line of credit, so when as you use the card for payment, the credit card company pays for it and then you pay them back. You may be talking about a prepaid card if you mean topping up your card.
Should you wish to have real-time answers to your questions, try our chat box on the lower right corner of our page.
Regards,
Jhezelyn
My business partner wants to send you money using a credit card. How can he/she do that?
Hello Dave,
Thank you for your comment.
If your business partner wants to send you money using a credit card, there are some ways to do it. Bank transfer, wire transfer, and money transfer services can help her/him do that. You may refer to our guide on how to send money. There may be factors that need to be considered when sending money. Like the fees, the currency, and other rates.
To send money, visit the website of the transfer service and start the process of sending the money.
Should you wish to have real-time answers to your questions, try our chatbox on the lower right corner of our page.
Regards,
Jhezelyn
I have an American Express platinum card. The yearly fee is now $550. I have had this card for over 10 years paying it off entirely each month. No balance. If I cancel this card because of the fee will it affect my credit score?
Hi Sandy,
Thank you for your comment.
The amount of time your credit card has been open affects your credit score, and is beneficial if you have a positive credit history. So closing that credit card you’ve had can actually hurt your score if you have a positive payment history. Know more about credit card cancellation and everything that goes with it.
I hope this helps.
Regards,
Jhezelyn
Will I have a monthly payment even if I don’t use the card that month?
Hi Chris,
Thanks for reaching out.
Provided that you have zero outstanding balance on you credit card, you should get zero interest. However, with regard to the fees, that would depend on the agreement you have with your bank. To be on the safe side, the best option would be to call the phone number at the back of your credit card.
Cheers,
Joanne