• Mon. Mar 4th, 2024

What Is Credit Card: How It Works, and How to Get One

BySarah Writer

Feb 6, 2024

A credit card is a payment card issued by a bank or financial company that allows the cardholder to borrow funds to pay for goods and services. The borrower can then pay back the money borrowed over time, with interest. Credit cards have become an essential financial tool for many consumers and businesses.

In this guide, we will explore everything you need to know about what a credit card is, how it works, the pros and cons of using one, and tips for responsible credit card use.

To start, a credit card is a thin rectangular piece of plastic issued by a bank or financial company. It allows you to borrow money from the card issuer to pay for goods and services or withdraw cash. You can use a credit card to make purchases online, over the phone, and in brick-and-mortar stores.

The main difference between a credit card and a debit card is that with a debit card, the money is immediately withdrawn from your bank account. With a credit card, you are borrowing money that you will need to pay back to the card issuer.

Every credit card has a credit limit, which is the maximum amount of debt you can carry on the account. The credit limit is determined based on your income, credit score, and credit history. Interest rates, fees, rewards programs, and other terms also vary depending on the type of credit card.

How Credit Cards Work

When you use a credit card to make a purchase, you are borrowing money from the card issuer. The issuer pays the vendor for the goods or services on your behalf. You then have a certain grace period, usually 20-30 days, to pay back the money without accruing any interest. This grace period allows you to use your credit card without paying interest, as long as you pay off your balance in full every month.

If you don’t pay off the full balance within the grace period, interest will accumulate on the unpaid amount. This is how credit card issuers make some of their revenue. The interest rate on credit cards tends to be quite high compared to other lending products. Rates commonly range from 12% to 26% depending on your creditworthiness. However, some cards offer 0% introductory APRs for balance transfers or purchases for a limited time.

Every month, the credit card issuer will send you a statement detailing your transactions, interest and fees if applicable, the minimum payment due, and the due date. It is essential to pay at least the minimum payment by the due date to avoid late fees and damage to your credit score. However, you should strive to pay off your full balance each month to avoid interest charges.

Credit Card Terminologies

APR: Annual Percentage Rate, the interest rate charged on balances.

Balance transfer: Moving debt from one credit card to another, often for a lower interest rate.

Cash advance: Using your credit card to withdraw cash from an ATM. There are usually fees and higher interest rates.

Credit limit: The maximum you can borrow on the card.

Grace period: The time you have to pay your balance before interest kicks in, usually 20-25 days.

Minimum payment: The lowest amount you can pay per month without being delinquent.

Rewards: Points, miles, or cash back you can earn per dollar spent when using certain credit cards.

How to Get a Credit Card

Getting your first credit card or applying for a new card requires some preparation and research to find the best fit for your needs. Here is a step-by-step guide to applying for and getting approved for a credit card:

1. Check your credit

Before applying, check your credit report from major bureaus and your FICO score. This gives you an idea of cards you may qualify for based on your creditworthiness. Sites like AnnualCreditReport.com and Credit Karma provide free access to your reports and scores.

2. Compare cards

Based on your credit score, research cards with features and perks that match your spending habits and financial situation. Compare APRs, annual fees, rewards programs, sign-up bonuses, and other benefits.

3. Consider card type

Determine if you want a general purpose, cashback, travel rewards, business, or other specialized card. This depends on where you spend the most.

4. Check if you pre-qualify

Many issuers let you pre-qualify online for their cards with a soft credit check that doesn’t affect your score. This helps estimate your approval odds.

5. Formally apply

When ready, formally apply by submitting your personal information, income, employment history, and social security number so the issuer can do a hard inquiry on your credit.

6. Get approved

If approved, you will receive confirmation by email or postal mail. You can then activate your card when it arrives and begin using it immediately.

7. Read all terms

Carefully review the cardmember agreement detailing APRs, fees, policies, and rewards programs so you understand how to properly use the card.

8. Activate benefits

Activate and use any benefits that come with your new card, like rewards programs, travel insurance, purchase protection, or other valuable perks and services.

9. Set up online account access

Log into your issuer’s website or app to access your account, make payments, review transactions, redeem rewards, and more.

10. Use responsibly

Use your new credit card wisely by paying balances on time and in full each month. Enjoy the perks and convenience, but avoid unnecessary debt.

Following these steps will help you find and obtain the ideal credit card tailored to your financial situation and spending needs. Be sure to use your new card prudently by paying off monthly balances and avoiding high-interest costs. Enjoy access to credit along with rewards and other benefits that make your credit card truly valuable.

Pros and Cons of Credit Cards

Credit cards can be very useful financial tools when used responsibly. However, there are also risks to be aware of. Here are some key pros and cons of using a credit card:


Build credit history

Responsible credit card use is an effective way to build a strong credit score, which is important for obtaining loans and qualifying for the best interest rates.


Credit cards eliminate the need to carry cash and provide a payment option accepted by millions of vendors. Cards can also be used easily for online, phone, and mail purchases.

Consumer protections

Credit cards provide stronger fraud and purchase protections than debit cards and cash. Issuers will often refund fraudulent charges, for example.


Many cards offer potentially lucrative rewards like cash back, miles, or points on purchases. Valuable perks like purchase insurance may also be included.

Short term loans

In a pinch, credit cards allow you to access short-term financing for unexpected expenses. 0% APR deals provide interest-free financing for a limited time.


High-interest rates

Credit card APRs are usually much higher than other financing options like personal loans or mortgages. It’s critical to pay balances off each month.

Penalties and fees

Late payments, going over your credit limit, cash advances, foreign transactions, and other mishaps can lead to expensive fees. Interest continues accumulating on unpaid balances each month.

Debt accumulation

Relying on credit cards as long-term financing can lead to significantly high interest-rate debt accumulation. It’s best to pay off balances monthly.

Security issues

Credit cards inherently carry a higher risk of fraudulent use and theft compared to cash or debit cards. It’s important to monitor statements closely for unauthorized charges.


Studies show people tend to spend more when using credit instead of cash. The rewards, convenience, and lack of immediate payment can lead to overspending.

Tips for Responsible Credit Card Use

Using credit cards wisely is key to maximizing the benefits while avoiding the pitfalls. Here are some tips for being a responsible credit cardholder:

Pay off balances in full each month

The best practice is to pay your balance on time and in full monthly to avoid interest charges. Set up autopay to ensure you never miss a payment.

Stay under 30% of your credit limit

Using more than 30% of your available credit can hurt your credit score, so stay far below the limit.

Read terms and make payments carefully

Be sure you understand interest rates, fees, and policies before signing up for a card. Review statements closely and pay on time.

Use cards for planned purchases only

Charge only what you can afford to pay off monthly. Don’t use credit for unnecessary impulse purchases. Cash and debit may be better options for discretionary spending.

Watch out for high fees

Cards with annual fees only make sense if you will use the perks enough to offset the cost. Avoid cash advance fees and late fees by paying on time and not using your card for cash.

Notify your issuer of travel

If you plan to use your card while traveling abroad or making a large purchase, notify your card issuer first to prevent fraud blocks.

Take advantage of rewards

Pick a card with a rewards program suited to your spending habits, and use rewards wisely for maximum value like transferring them to airline partners or using cash back to offset purchases.

Monitor your credit

Check credit reports and FICO scores regularly to catch any unauthorized activity and monitor your credit standing. Free services like those from Credit Karma make this easy.

Consider balance transfers cautiously

Moving debt to a card with a lower interest rate can save substantially on interest, but it’s best if you can pay off the balance during the 0% intro period.

Types of Credit Cards

There are a wide variety of credit cards tailored to different consumer needs. Here are some of the major types of credit cards and their distinguishing features:

General purpose cards

Cards like Visa, MasterCard, Discover, and American Express can be used nearly everywhere. Perks and points programs vary greatly. Most fit in the categories below.

Cash back cards

These cards pay out a percentage of purchases back to you as cash rewards. Typical cash-back rates range from 1-6%. Some have tiered rewards like 5% back on groceries or travel. Great for those who prioritize cash rewards.

Travel rewards cards

Rather than cash back, travel rewards cards earn points or miles that can be redeemed for travel reservations, upgrades, and other perks. These are best for frequent travelers who can maximize redemptions.

0% APR cards

Cards offering 0% intro APR on purchases or balance transfers allow interest-free financing for a set period, usually 12-18 months. Convenient for large purchases or debt consolidation.

Business cards

Designed for small business owners, these often provide great rewards for business spending. Some offer perks like employee cards and easier accounting.

Secured cards

Require a cash deposit used as collateral. Help those trying to establish or rebuild credit. Usually have lower credit limits and fewer perks.

Charge cards

Require paying statement balances in full each month rather than carrying a revolving balance. Offer premium rewards and benefits. Examples are American Express Gold and Platinum.

Retail cards

Can only be used at a particular retailer. Store-specific discounts and promotions may be offered, but carry high APRs as a tradeoff. Good only for heavy customers of that brand.

Which type of credit card is best depends on your spending habits, financial situation, and goals in getting a card. Compare different cards’ fees, rates, rewards programs, and other features carefully to find the right fit.


Credit cards have become a staple of the modern digital economy for their convenience and ability to finance purchases. When used responsibly, they can be an effective financial tool that enhances your lifestyle in many ways, from reward points to purchase protection. However, carrying balances, incurring interest, late fees, and other pitfalls can make credit cards a dangerous financial trap.

The key is educating yourself thoroughly on how credit cards work, their pros and cons, and smart usage tips. Approach credit cards as a convenient payment tool rather than as financing and carefully consider how each card fits your spending habits and goals. Monitor statements closely, pay off balances promptly each month, and avoid late fees, high balances, and cash advances. With prudent use, credit cards can be an effective way to build your credit profile for the future while enjoying perks and rewards along the way.

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