How Do Credit Cards Work?
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When you pay with a credit card, your card issuer guarantees payment to the merchant on your behalf. In turn, you will be sent a statement at the end of your billing cycle informing you of the total amount you owe from purchases as well as any other fees. Cardholders will need to make payments toward this balance. Interest charges will apply to any unpaid statement balance.
One important element of how credit cards work is understanding how credit card interest works. Unpaid balances, like when you only pay off part of your bill, are typically charged interest at high rates—meaning you’ll owe even more the next month. Each issuer sets its own APR and calculation terms, making it essential to pay attention to the details.
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How Do You Use a Credit Card?
Credit cards can be used to make payments for most goods and services either at the point of sale by swiping your card, inserting a chip, tapping to pay or providing the card number and expiration date online or by phone.
When you use a credit card, you’re essentially accessing a line of credit provided by your card issuer (such as Chase or Capital One). They’re paying the tab to the merchant and giving a short-term loan to the cardholder. Like any loan, the exact agreement terms may be impacted by factors in your personal finances, so you’ll want to check the details on your interest rate, minimum payment requirements and due dates before you decide how to use a credit card.
Types of Credit Cards
There are many different types of credit cards, each with their own advantages. The most common credit card types include:
- Cash-back credit cards
- Travel credit cards
- Rewards credit cards
- 0% APR credit cards
- Balance transfer credit cards
- Student credit cards
- Secured credit cards
- Business credit cards
Choosing the right type of credit card for your needs will depend on your creditworthiness, your preferences in rewards, the fees you’re willing to pay (if any) and other variables.
Benefits of Using Credit Cards
Credit cards make it easy to pay for purchases, including when you may not have the cash up front. Some cards may offer interest-free financing for a limited time on new purchases or balance transfers, which is another strong advantage of credit cards. Credit cards also offer purchase and fraud protections that make it less risky than carrying cash or paying with a debit card.
Another advantage of credit cards is that they may offer rewards programs to earn cash, points or miles. In addition, some credit cards may also offer special perks or statement credits toward select purchases or with partnering brands. This is especially common on premium travel cards.
Lastly, credit cards are an excellent tool for building your credit score, assuming you use them responsibly.
How To Get a Credit Card
Before you apply, you’ll want to be prepared with a grasp on which card is right for you, what your credit score is and what your approval odds are. Then, the process of how to get a credit card is straightforward.
Submitting a credit card application online requires answering questions about your contact and financial information. For step-by-step tips on setting yourself up for success, check out our guide on how to apply for a credit card.
When Should You Get a Credit Card
Most credit cards require you to be a minimum of 18 years old to apply, but other than that, the timing of when to get a credit card is mostly a personal choice.
Picking when you should get a credit card should be based on when you need the card as well as when you are financially secure enough to pay your bill consistently on time. It’s also best to make a plan to pay the bill in full each month—that way, you can avoid interest charges and other fees.
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