Credit Cards

A credit card is a plastic or metal payment card that allows people to make purchases without having the money upfront, then pay back the card issuer over time. In return for the ability to make purchases on credit, the cardholder may have to pay interest or fees. Those fees and interest charges depend on the card and how soon the cardholder pays the bill in full.

Using a credit card responsibly also is one of the most efficient ways to build credit. Having a solid credit history is crucial for things like buying a house, purchasing a car or getting approved for a personal loan in the future.

Overview of How Credit Cards Work

Credit cards require regular payments to keep the account open and in good standing. To that end, cardholders receive a credit card statement once a month, which details purchases and payments made during that billing cycle and notes when a payment is next required.

If you pay for your purchases within the window of the grace period on the account (typically between 21 and 25 days after the monthly statement is issued), you won’t have to pay more than you borrowed. If you carry your balance past that, however, you’ll generally have to pay the regular interest rate - or regular APR - on the amount you owe. Credit cards have higher regular APRs than most consumer loans, so it’s best to avoid carrying a balance.

Outside of interest charges, credit cards may come with fees. Late fees apply to nearly all credit cards when you don’t pay at least the minimum payment by the due date. Annual, monthly, and one-time fees may be charged just to have certain credit cards, too. The credit cards with the biggest benefits and perks - travel credits, free airport lounge memberships, and the highest rewards rates, to name a few - are usually the ones with annual fees.

Key Things to Know About Credit Cards

• Credit cards are rectangular pieces of plastic or metal measuring 3.4 inches by 2.1 inches. They are the same size as a debit card, prepaid card, gift card or driver’s license.
• Credit cards have a magnetic stripe as well as an EMV chip programmed with the information needed to complete a purchase. Some new credit cards also have an RFID chip for contactless payments.
• Making a purchase with a credit card enables the user to securely borrow money as needed and then repay the card’s issuer after the fact.
• Using a credit card responsibly is the easiest way to build a good credit score.
• Other benefits for credit card users include the opportunity to earn rewards on purchases, the flexibility to pay off large purchases over time, or the chance to reduce the cost of existing debt through a balance transfer.
• Banks and credit unions offer credit cards because they are a good source of income from fees and interest charges.
• To qualify for a credit card account, an applicant must be at least 18 years old with enough income to afford monthly bill payments.
• There is no minimum age to get a credit card as an authorized user.

In short, a credit card is one of the most valuable financial tools available to consumers, allowing them to make purchases and pay them back later, all while building a credit history.

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.

Finding the right credit card can be stressful, with so many offers to consider and so much jargon and fine print to decipher. But as long as you follow these simple pointers, you’ll be fine.

1. Compare credit cards before applying. Otherwise, there’s no way of telling whether you’re getting the best deal. Marketing can be deceiving, after all. 
2. Make sure your credit is match. You should only consider applying for a credit card if it matches your credit standing. For example, don’t apply for an excellent-credit credit card if you have fair credit. Getting turned down will only make it harder to get approved the second time around.
3. Don’t apply in bulk. You should not submit more than a couple credit card applications within a short period of time, as this can lead to a roughly six-month dip in your credit score.

For more tips, check out WalletHub’s guide on finding the right type of credit card for your needs. And for your convenience, here are some benchmarks to consider as you wade your way through the credit card comparison process:

Market Snapshot: 1,000+ Credit Card Offers

You can learn more about the average terms offered by credit cards in popular categories from WalletHub’s latest Credit Card Landscape Report. 

The average adult has 5.6 credit cards: 3.1 cards that can be used anywhere and 2.5 store cards, according to 2017 data from Experian. But there’s no golden rule for how many credit cards you should have, or how many credit cards is too many. It depends on personal preference as well as your credit standing and organizational skills.

Using more than one credit card can help you save by allowing you to get the best terms for every transaction that you make. No single credit card offers the best rewards in every purchase category, plus the lowest rates and fees. But you can achieve that effect with a collection of cards that each excel in a particular area. For example, you could get the best cash back credit card for everyday spending, the best travel rewards card to earn extra on airfare and hotel reservations, and a 0% credit card before making a big-ticket purchase.

Using multiple credit cards for the wrong reasons, however, can get you into big trouble. Numerous credit card applications in a short period of time can hurt your credit score, for one thing. And even more importantly, having too many credit cards can lead to overspending, expensive interest charges, missed payments and even more credit score damage.

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There is no minimum credit score to get a credit card, if any credit card will do. Some credit card companies don’t even check applicants’ credit history, and the main approval requirement is that you earn more money than you spend. So it’s certainly possible to get a credit card even if you have a very low credit score or no credit score at all.

But there is a difference between getting approved for a credit card in general and getting one of the better offers.

The credit score needed for credit card approval ultimately depends on which specific card you want to get. Most of the time, credit card companies have a credit score tier they’re looking for, and applicants will need a score in the required tier (or higher) for a good chance of approval. The tiers are bad, fair, good and excellent.

The thing is, credit cards require scores that are a bit higher than the traditional minimum for each tier in the overall credit score range, according to WalletHub’s research. So for each credit tier, you can see a “traditional” score range and a “WalletHub recommended” score range below.

Here is the credit score needed for a credit card at each level:

 One way to estimate your credit card approval odds is to check for pre-approval. Many major issuers will allow you to check for free. It won’t hurt your credit score. And you’ll get a pretty good idea of your chances. Plus, if you’re not sure what your score is yet, you can check your latest credit score for free on WalletHub. You’ll also get personalized credit card recommendations with high approval odds.

Just remember that having a qualifying credit score does not guarantee credit card approval. The credit card application process takes many other factors into account. Payment history, existing debt and income play big roles, too.

There are six types of credit cards: 

1. Standard unsecured credit cards
2. Secured credit cards
3. Credit cards for students
4. Small business credit cards
5. Store credit cards
6. Charge cards

These six types of credit cards differ based on the type of user they’re intended for, where they can be used, and what’s required of applicants.

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Discover and Capital One are easy banks to get a credit card from. Both of these major banks are common choices for first credit cards, likely because both have credit cards for every level of creditworthiness. Reports online also suggest Discover and Capital One are more relaxed about credit card approval requirements than other major banks. For example, someone with a borderline “good” credit score may get approved for a card that requires “good” credit.

If you have bad credit or no credit, any bank that offers a secured credit card will be easier to get a credit card from than a bank that doesn’t offer secured cards. Capital One, Discover, Bank of America, Citibank, and U.S. Bank are five major banks that offer secured credit cards. These credit cards require a deposit, which becomes your credit limit. And in general, you can get a secured credit card with bad credit.

It's worth noting that any previously-existing relationships you have with banks may come in handy, too. If the bank you have a checking account with offers a credit card, that will likely be an easy bank to get a credit card from. Your established relationship with your bank gives them access to your day-to-day deposit account history, which doesn’t show up on your credit report. So that’s extra potentially good information that’s available to your bank and not to other card issuers you might apply for a credit card with.

A rewards card gives the cardholder something back for each purchase, usually a percentage of the purchase amount as cash back, miles, or points. You can sometimes earn bonus rewards by spending a certain amount in the first few months you have the card, too. You can then redeem the rewards, usually for merchandise, statement credits, gift cards or travel. Generally, your rewards will be available to use after you see them tallied up on your online account or monthly statement.

There are 3 kinds of rewards credit cards, and each is valuable to a certain type of lifestyle. But most rewards cards give at least one rewards unit per $1 spent. That can add up to 1% back or more, depending on the redemption method and credit card.

Cash back credit cards give a percentage of your purchases back to you as a statement credit, check, or bank deposit. Some cash back credit cards have set tiers for rewards - they’ll give 2% back at gas stations and 3% back at restaurants, for example. Others have rotating categories for different levels of cash back, which usually change once per quarter. The good thing about cash back is that it can’t be devalued by credit card companies, like miles or points can.

Points credit cards usually give at least 1 point per $1 spent. Typically, you can expect to redeem points for travel, merchandise, cash back, or gift cards. Many points credit cards also allow you to redeem for a charitable donation or for tickets to special events. Hotel credit cards are usually points credit cards, too. If you stay at that particular hotel brand a lot, there are often many bonus points and loyalty perks to be earned on those credit cards.

There are a lot more redemption options with points than cash back, but that doesn’t mean all points redemptions will be equal. Points are worth more with some methods than others. Credit card companies could make each point worth 1.25 cents when redeemed for gift cards and 1 cent when redeemed for cash back, for example. This can make it hard to pin down how much a point is actually worth.

Miles credit cards are made for travelers, obviously. In fact, many airline credit cards give rewards as miles. Most credit cards that give miles will also allow you to redeem for cash back, merchandise or other things, but redeeming miles for travel will usually give you the best redemption value. Like other rewards cards, you’ll generally get one for one - one mile per $1 spent. And like credit cards that give points, you’re also subject to devaluation with miles. The card issuer can decide that all your earned miles are worth half as much as they were when you earned them.

Overall, rewards credit cards work best when you get the one that’s right for your spending habits and lifestyle. So it’s worth reading a credit card’s reward redemption terms before you apply for one. One thing to watch out for is that some rewards credit cards have thresholds for redemption, meaning you need a certain amount of reward credits saved up to redeem them. And you definitely want to redeem your rewards often, especially if you’re earning miles or points, because those units can be devalued anytime.

Credit card interest is what you get charged when you don’t pay off your full balance by the due date each month. When you carry, or revolve, a credit card balance from month to month, interest is charged on a daily basis, and it affects both your existing balance and any new purchases that post to your account. The interest you’re charged one day also becomes part of the balance accruing interest the next. In other words, credit card interest compounds daily. That, combined with the fact that credit cards are known for having high rates, is why credit card debt is so expensive.

But you can avoid credit card interest by paying your bill in full every month. Interest doesn’t apply to your daily balance when you do so. And most credit card companies will give you an interest-free grace period lasting roughly 25 days, from when your monthly statement gets generated to your due date. But you lose that grace period if you don’t pay in full one month, and it takes two consecutive months of full-balance payments to get it back.

That should help clarify things, at least a little bit. But credit card billing practices are complicated, and there are a lot more questions to answer. So continue reading to take a closer look at how credit card interest works, including how it’s calculated, when it starts and stops accruing, how rates are assigned, and more. You can also see how much credit card debt is costing you, and how much you could save with a better card, using WalletHub’s credit card interest calculator.

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If you’re instantly approved for the credit card that you apply for, you should see the good news on your screen within a minute of submitting your application. Whether or not you’re approved instantly, you’ll receive notice of the issuer’s decision via email. This could take up to 14 business days, but applications are generally processed after that.

Finally, if you’re approved for a credit card, you will receive the card in the mail within 7-10 business days of approval. If you would like to check the status of your application, we recommend calling the issuer’s customer service department. Some credit card companies also let you check on their website.