How Credit Cards Work: A Beginner’s Guide

Your life doesn’t always match up with your pay schedule. That’s why having access to flexible credit options is so helpful. Applying for a credit card can give you the freedom to make both small and large purchases when you need them, with the ability to pay the money back over time in a way that works for you.

Using your credit card responsibly is also a great way to build credit. Establishing good credit can open doors to exciting opportunities like financing a new home or car.

Consider this your beginner’s guide to credit cards—from how they work to using them wisely—so you can feel confident about making smart financial choices.

• What is a credit card?
• How do credit cards work?
• Different types of credit cards
• Applying for a credit card
• Understanding credit card statements
• What is a credit card balance?
• How do credit card payments work?
• How do credit card interest rates work?
• Common fees and penalties
• How credit cards affect credit score

What is a credit card?

A credit card is a financial tool that lets you borrow money up to a set limit for purchases and bills. Credit cards work differently than debit cards. With a debit card, you’re spending your own money directly from your checking account. With a credit card, when you swipe, tap or enter your card number, you’re borrowing funds from the credit card company with a promise to pay it back.

How do credit cards work?

Understanding how credit cards work is relatively straightforward. When you’re approved for a credit card, your card issuer provides you with a credit limit based on factors like your credit score, income and existing debt. This limit represents the maximum amount you can borrow at any given time.

Each time you make credit card purchases, your available credit decreases by that amount. As you make payments toward your balance, your available credit increases again. This cycle of borrowing and repaying is called revolving credit. 

Understanding the different types of credit cards

The various credit cards available to you have different functions and credit limits. Knowing your options can help you choose a card that works best for you.

Applying for a credit card

Getting a credit card starts with an application, most of which can be completed online. You’ll typically receive a decision quickly (sometimes instantly). If you’re approved for a new credit account, your new card will arrive in the mail within 7-14 business days.

Whether you’ll be approved and how much credit you’ll have access to depends on the type of credit card you apply for as well as your financial health. Credit card issuers consider several factors when reviewing your application.

Understanding credit card statements

At the end of each billing cycle (typically 30 days), your card issuer creates a statement showing all transactions made during that period. Learning how to read and understand this document is an important part of responsible credit use. Each statement contains several key sections:

• Account summary: Shows your previous balance, payments, credits, fees, etc.
• Payment information: Details the minimum monthly payment amount and due date.
• Transaction details: Lists each purchase, payment and credit from the billing cycle.
• Interest charges: Explains any interest applied to your account, including the APR.
• Available credit: Indicates how much of your credit limit remains available for use.
• Rewards summary: Tracks points, miles or cash back earned from your spending.

When your statement arrives, it’s important to review all transactions to verify their accuracy. Contact your card issuer promptly if you notice any unfamiliar charges to protect yourself from unauthorized use.

What is a credit card balance?

Your credit card balance represents the total amount you currently owe to your card issuer. There are two main types of balances you’ll see when checking your credit card account:

When you make a purchase, it may initially appear as "pending" until the transaction fully processes. This temporary status represents the time between when you made the purchase and when it officially posts to your account. Tracking pending purchases and your current balance can help you stay within your card’s credit limit.

How do credit card payments work?

Each month, your credit card statement is a reminder to make a payment toward the statement balance. Paying your credit card bill on time can help you improve your credit history and your creditworthiness. On the flip side, making late payments can have detrimental effects on your credit score. Thankfully, you'll have several convenient options for making payments:

• Set up automatic payments scheduled from your checking account.
• Pay online through your card issuer’s website or mobile app.
• Pay by phone using the customer service number on your card.
• Pay by mail using the payment coupon included with your paper statement.
• Pay in person at a branch location if your issuer has physical branches.

Your billing cycle repeats each month, with new charges added and payments subtracted from your balance. While paying the minimum balance keeps your account current, paying your full statement balance by the due date helps you avoid interest payments.

How do credit card interest rates work?

If you don’t pay the full balance on your credit card each month, you’ll have to pay interest. Interest is the cost of borrowing money, typically expressed as an annual percentage rate (APR). This rate determines how much extra you’ll pay when you carry a balance from month to month. Your card may have several different APRs that apply in specific situations:

• Purchase APR: The standard rate applied to purchases when you carry a balance.
• Introductory APR: Often a temporary lower rate offered to new cardholders.
• Balance transfer APR: The rate applied to balances moved over from other cards.
• Cash advance APR: Applies when you withdraw cash with your credit card.
• Penalty APR: A higher rate that may be applied if you miss payments.

Interest is calculated based on your average daily balance throughout your billing cycle. The higher your balance and APR, the more interest you’ll pay. Making only minimum payments means carrying credit card debt (and paying interest on it).

Common credit card fees and penalties

As part of your credit card agreement, your issuer may impose fees on certain types of credit cards or card activities. These are extra costs that you’ll be responsible for outside of repaying borrowed amounts (and interest). Some of the most common credit card fees you might encounter include the following.

How do credit cards affect your credit score?

How you use credit cards plays a big role in shaping your credit score. Lenders want proof of your ability to borrow money and repay responsibly. To get it, they’ll look at your credit score. The three major credit bureaus—Equifax^®, Experian™ and TransUnion^®—assess credit scores based on consumer credit card activity, among other factors.

Making on-time credit card payments shows lenders you’re reliable, which can boost the payment history portion of your score (35% of your total score). The amount you owe compared to your credit limits (credit utilization) makes up another 30% of your score. Credit utilization is a big factor in calculating your credit scores, so keeping that number low is generally recommended.

Credit cards can also help establish the length of credit history. Each time you use your card responsibly—paying on time and keeping balances low—you’re building a positive track record that can help you qualify for better interest rates on loans, mortgages and even more rewarding credit cards in the future.