How do credit cards work? A beginner's guide (2019) |
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How do credit cards work? A beginner’s guide (2019)

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Learn the basics of credit cards — and how to choose your first one.

Once you get the hang of them, you’ll find that credit cards are incredibly helpful financial tools. If you’ve been wondering, “How do credit cards work, anyway?” here’s a guide to get you up to speed.

What is a credit card?

Here are credit cards in a nutshell: When you use your card, you’re borrowing money from a bank to pay for your purchase. Later, you’ll repay your bank for what you’ve bought.

Of course, there are many other mechanics of credit cards: limits to how much you can borrow, when you have to pay your bank back and more. We’ll cover these in the following sections.

    How do credit cards work?

    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. If you want to learn more about credit card features, check out our full article.

    Basic credit card mechanics

    Balance and credit limit

    The amount you’ve borrowed on your card — but not yet paid back — is called your balance. There’s a maximum balance you’re allowed to have at any given time, which is called your credit limit.

    Be careful not to exceed your credit limit, or you might be penalized with a fee.

    Revolving credit

    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.

    But this is where the magic of revolving credit comes in.

    • 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.

    Billing cycles

    Swiping your credit card means 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.

    Check when your billing cycle begins and ends

    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.

    Credit card statements

    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.

    How does interest work?

    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.

    How to avoid paying interest

    After each billing cycle, your card provider will typically give you a grace period to pay off your purchases. If you pay your entire balance within this period, i.e., by the specified due date, you won’t be charged interest.

    When you’ll be charged interest

    If you pay less than your full balance by the due date, your remaining balance will accumulate interest at the applicable interest rate.

    How is interest charged?

    Interest is charged as an APR, or annual percentage rate. For example, your card might have an APR on purchases of 20%.

    The average credit card APR is around 17%. Regardless of your card’s APR, it’s a good idea to avoid interest whenever possible.

    To learn more about how interest works, check our guide here.


    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.

    Chase Credit cards bonus screenshot

    Keep an eye out for other fees that could include:

    • Balance transfer fee. For moving your existing credit card debt to your new card.
    • Cash advance fee. For using your card to collect cash.
    • Foreign transaction fee. For using your card outside the US.
    • Late payment fee. For paying at least your minimum after your statement due date.
    • Overlimit fee. For making a transaction that exceeds your credit limit.
    • Returned payment fee. For sending a payment that bounces — for instance, if you enter your checking account number incorrectly.
    • Returned check fee. For paying with a check that’s returned due to insufficient funds or a closed account.

    Fees table

    Compare the most common credit cards

    Name Product Filter values Rewards Purchase APR Annual Fee
    7x points on Hilton Honors purchases, 5x at US restaurants, US supermarkets and US gas stations, 3x on all other purchases
    17.99% to 26.99% variable
    Earn 75,000 Hilton Honors™ Bonus Points after you spend $1,000 in purchases on the card within your first 3 months of card membership. Rates & fees
    5x points on directly-booked flights or on flights and hotels on Amex Travel. 1x points on all other purchases
    Get 5x Membership Rewards® points on flights booked directly with airlines or with American Express Travel and 5x points on eligible hotels booked on Rates & fees
    0% for the first 18 months (then 13.24%, 17.24% or 21.24% variable)
    An 18 months 0% intro APR period on both purchases and balance transfers, plus zero foreign transaction fees, makes this is a strong well-rounded card. See Rates and Fees
    3% cash back on up to $10,000 in the first 12 months, then 1.5% on all purchases
    0% for the first 12 months (then 15.24%, 19.24% or 25.24% variable)
    Earn 3% cash back on up to $10,000 in the first 12 months, then 1.5% on all purchases. See Rates and Fees.
    2x miles at US restaurants and on direct Delta purchases and 1x miles on all other purchases
    17.99% to 26.99% variable
    Earn 10,000 bonus miles after spending $500 in purchases on your new card in your first 3 months of card membership. Rates & fees

    Compare up to 4 providers

    Name Product Filter values Purchase APR Annual Fee Recommended Minimum Credit Score
    19.64% variable
    A secured Visa® credit card that helps you build your credit quickly.
    26.74% variable
    No credit history or minimum credit score required for approval.
    14.74% variable
    No minimum credit score and no credit history required.
    20.74% variable
    Build your credit with all three major credit bureaus.
    9.99% fixed
    This secured card can help you rebuild your credit with an initial deposit of $200 to $1,000.

    Compare up to 4 providers

    Name Product Filter values Annual Fee Purchase APR Recommended Minimum Credit Score
    24.9% variable
    A no-annual-fee credit card and discounts when you shop at Target.
    See terms
    See issuer's website
    Build your credit history with low monthly payments.
    See terms
    See issuer's website
    Get access to purchase items in the Fingerhut store with no overlimit fees.
    5.75% to 23.99% fixed
    Buy now, pay later — low monthly payments make shopping easier
    5.75% to 23.99% fixed
    Payments starting at just $10 a month.

    Compare up to 4 providers

    Types of credit cards

    There’s a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are the different card types you’ll find on the market.

    Different types of credit cards

    Standard credit cards

    Rewards credit cards

    Rewards cards provide bonuses for your everyday spending.

    Credit repair cards

    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.

    Specialty credit cards

    Charge cards

    Find your ideal rewards credit card

    See our recommendation in two clicks.

    Credit card terms you should know

    Here are a few important terms you should know while you look for a credit card.

    Credit card terms


    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.

    interest rates and interest charges table

    Fixed vs. variable interest rates

    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.

    Citi disclosures interest rates and interest chrages table

    prime rate image

    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.

    best buy webpage screenshot 6 to 12 month finincing on storewide purchases

    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.

    Balance transfer

    When you initiate a balance transfer, you move your existing credit card debt onto a new card. Any debt you move will be subject to your new card’s balance transfer APR.

    Important credit card disclosures

    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. Check out our full guide to learn more about how balance transfers work.

    Fees table

    Interest rates and interest charges table

    Cash advance

    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.

    fees table
    interest rates and interest charges table

    Credit utilization ratio

    Your credit utilization ratio is how much you owe on your credit cards compared with your total credit limits.

    For example:

    • Say you have three credit cards with different credit limits: $1,000, $2,000 and $3,000. This means you have $6,000 in total credit.
    • You carry a $1,000 balance on your first card and a $2,000 balance on your second card. You carry no balance on your third card. In total, you carry a $3,000 balance across all of your cards.
    • Overall, you have a $3,000 balance and $6,000 in total credit. So your credit utilization is $3,000 divided by $6,000 — or 50%. If you had a $2,000 total balance, your credit utilization would be $2,000 divided by $6,000 — or 33%. And so on.

    Your credit utilization factors heavily into your credit score. It’s a good idea to keep it below 30% at all times.

    Issuers vs. networks

    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 like Visa Concierge or Mastercard roadside assistance.

    Read our guide to learn more about credit card issuers and networks.

    Credit cards and credit scores

    When you apply for credit from a lender — for a mortgage, car loan or credit card — your credit score matters. Lenders check your credit score to gauge their chances of being repaid.

    Your credit score is a numerical measurement of how trustworthy you are as a borrower. Many organizations calculate credit scores, but the go-to source is a company called FICO.

    What is the range of FICO scores?

    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:

    • Excellent — 740 to 850
    • Good — 670 to 739
    • Fair — 580 to 669
    • Poor — 300 to 579

    You’ll qualify for different credit cards depending on your credit score.

    What types of credit cards are suitable for beginners?

    These types of products are excellent picks for a first-time credit card:

    • No-annual-fee cards.

      While you’re learning the ropes of credit cards, it’s helpful not to have to pay an annual fee. You can use your card as much or as little as you want, without paying to maintain it.

    • Secured cards.

      This is a strong option if you don’t have a credit score yet. Because you must put down a security deposit, more lenders will be willing to accept you as a customer.

      As you slowly build your credit score, you can apply for better cards.

    • Student cards.

      An excellent choice if you’re currently enrolled in college. Providers are often willing to approve you even if you’re new to credit.

    Do I need a credit card?

    It’s natural to be afraid to apply for a credit card. The truth is, there are good reasons to get a card, as well as situations in which you shouldn’t get one.

    How to choose a credit card

    With so many credit cards on the market, there’s no “perfect” card. Pick one that’s best for your needs by comparing a few factors.

    Comparing credit card factors

    Your financial situation

    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

    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 a secured credit card to rebuild your credit.

    Your age

    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 and consumers under 21.

    Your income

    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.

    Your personal interests

    You can find a card that complements your interests. For example, if you like staying at a certain hotel chain, you can 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.

    How to apply for your first credit card

    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.

    We’ve assembled a few common application requirements you can expect when applying for a credit card.

    What happens after I apply for a credit card?

    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!

    Bottom line

    It’s a great feeling when you finally get your first credit card. At this point, resolve to build good financial habits. Keep your spending in check and pay off your balance in full each month. These are the keys to using a credit card like a pro, building your credit score and opening new financial opportunities.

    For our best credit card picks of 2019, check out our guide here.

    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.

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    8 Responses

    1. Default Gravatar
      DaveSeptember 5, 2018

      How do I top up my credit card ?

      • Avatarfinder Customer Care
        JhezSeptember 6, 2018Staff

        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.


    2. Default Gravatar
      DaveSeptember 5, 2018

      My business partner wants to send you money using a credit card. How can he/she do that?

      • Avatarfinder Customer Care
        JhezSeptember 6, 2018Staff

        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 through money transfer services can help her/him do that. Please see this page and read the 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 chat box on the lower right corner of our page.


    3. Default Gravatar
      SandyOctober 20, 2017

      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?

      • Avatarfinder Customer Care
        JhezOctober 21, 2017Staff

        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. Kindly refer to this page about credit card cancellation and everything that goes with it.

        I hope this helps.


    4. Default Gravatar
      ChrisOctober 5, 2017

      Will I have a monthly payment even if I don’t use the card that month?

      • Avatarfinder Customer Care
        JoanneOctober 8, 2017Staff

        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.


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