WalletHub, Financial Company
@WalletHub
Credit cards work based on a buy-now-pay-later arrangement with the cardholder, with fees and interest supporting the cost of lending. When you use a credit card to make a purchase, you’re borrowing money from the credit card’s issuer to complete the transaction, and then repaying the amount at the end of the billing cycle, either in part or in full. By paying the bill in full each month, you’re essentially borrowing money for free, because you will be avoiding interest charges. If you can’t pay your balance in full, at least make the minimum payment required by the due date. Interest will be applied to the remaining balance, but you won’t damage your credit score.
Credit cards also work for transactions other than purchases, including balance transfers and cash advances, which have the potential to be even more profitable for issuers. Balance transfers give people the chance to repay existing debt with a lower interest rate, for a fee – usually 3% to 5% of the transferred amount. Cash advances let you withdraw cash from your credit line, but a high fee and interest rate apply right away.
How Credit Cards Work:
- Credit cards allow users to buy now and pay later, even over the course of months.
- Credit cards enable cardholders to build credit, unlike debit cards.
- Some credit cards reward cardholders for making purchases. Some cards charge annual membership fees.
- If cardholders don’t pay their full balance by the due date each month, interest charges are added to the balance each day.
- Credit card approval depends on an applicant’s overall creditworthiness. Credit history, income and debt obligations are important factors.
How Credit Card Rewards Work
Many credit cards reward cardholders with cash back, points or miles for every purchase made. Plus, the best credit cards often come with signup bonuses that cardholders can earn after meeting a minimum spending requirement in the first few months. Some credit cards offer low introductory interest rates, too.
This isn’t charity, though. Credit cards offer short-term borrowing and give rewards because it’s profitable for credit card issuers. If a cardholder decides to pay off a credit card balance over time, they’ll have to pay interest. And if they have the chance to earn rewards, they’re likely to spend more than they would otherwise.
Building Credit with Credit Cards
Generally, the credit cards with the best rewards, rates, and benefits go to people with high credit scores, a lot of income, and little-to-no debt. But if you’re new to credit, credit cards are the best credit-building tools around. As long as you use the card responsibly and pay the bill on time every month, or never make purchases with the card at all, the issuer will report positive information to the credit bureaus each month. Plus, it’s very easy for someone with no credit to get a credit card, especially a secured card where your credit limit is based on how much you put down as a security deposit.
Learn More About How Credit Cards Work
Now you know how credit cards work, in a nutshell. That said, many of the finer details of credit cards – including all the types of credit cards available and how credit card interest works – don’t exactly fit in a nutshell. That doesn’t make them any less important to learn about, however, especially if you’re considering getting a credit card for the first time.

2021's Best Credit Cards
Compare CardsKathryn B. Hauer, CERTIFIED FINANCIAL PLANNER (TM)
@KathrynHauer
Hi! Thanks for writing! A credit card (as opposed to a "debit card" which is a card that lets you pull money right out of your account without the hassle of having to write a check) lets you buy things and pay for them later. It is a type of loan or debt called "unsecured debt." "Secured debt" means that there is a tangible asset such as your car or house as collateral for the loan. Rates tend to be lower for secured loans because lenders figure they can sell the house or boat to get back their money if you don’t pay the loan back. "Unsecured debt" is guaranteed only by your promise to pay it back. If you don’t pay, lenders will work to get their money back, but, as the saying goes “you can’t get blood out of a turnip.” So lenders run risk never getting the money they lent to you back. That’s why they charge a higher interest rate on unsecured debt.
A credit card lets you borrow conveniently, have money ready when you need it, especially in emergencies, and access a revolving line of credit. Credit cards require a minimum payment each month, but if you only make the minimum payment you incur a high rate of interest (between 13% and 25% or even more). Credit cards are useful because they help during emergencies; are safer and more convenient than carrying cash; allow you to easily make large purchases; help you build a financial credit history that in turn helps you get mortgages, home rentals, insurance and even job more easily and at lower rates; yield travel and other rewards; and let you spend money you don’t have. The primary disadvantage of a credit card is the same as its main advantage: it lets you spend money you don’t have, so you can get into financial difficulties if you spend more with your credit card than you can pay back.
To get a credit card, you apply for one at one of the credit card companies - Wallet Hub has great comparison sites to check, compare, and apply. Thank you so much for writing and best wishes to you!
RHONDA STEWART, New Grad
@rhonda
In layman’s terms, credit cards let you borrow money up to an approved limit, which must be repaid. You'll be charged interest if you don't pay your full statement balance by its due date.
Positive payment activity will help build and improve your credit scores.
People also ask
ROBERT SAMBRICK, FinTech entrepeuner
@robsam
Credit cards offer you a line of credit that can be used to make purchases, balance transfers and/or cash advances and requiring that you pay back the loan amount in the future.
A credit card is pretty much a key to a loan.
Did we answer your question?