How Do Credit Cards Work?
Key Points About: How Credit Cards Work
A credit card gives you a line of credit you can use to make purchases up to the limit approved by your credit card company.
You should pay at least the minimum amount due each month on your credit card bill.
Some credit cards offer rewards for eligible purchases, such as cash back or Miles.
Put simply, a credit card is a type of loan. A credit card issuer gives you a line of credit you can use to make purchases. In exchange, you pay at least the minimum monthly payment by the due date. If you pay your credit card balance in full and on time every month, you won’t pay interest on regular purchases.
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The bank or credit card issuer approves you for a credit card based primarily on your credit history and credit score, which can help determine how likely you are to repay the money you borrow.
How does credit cards affect your credit score?
Each month, you’ll have to pay at least the minimum payment due (as determined by your credit card issuer). You can also make a larger credit card payment or make payment in full. Making timely payments is one of the first good credit card habits you’ll want to adopt, because “payment history” makes up the largest percentage of your three-digit credit score, according to USA.gov.
As you become more comfortable using a credit card, you’ll also want to make a habit of keeping your overall utilization low. Your credit utilization rate, another important factor in your credit score, is the amount that you owe on your credit cards (your credit card debt) compared to your total available credit across all your credit accounts.
How does credit card interest work?
If you do not pay your statement balance in full each month, your card issuer my charge you interest fees on purchases. If you take a cash advance or make a balance transfer, you may get an interest charge from the date the transaction posts to your account. While credit cards give you the flexibility to take your time paying back what you owe, you may pay for the privilege of doing so. Be sure to check the terms of your cardmember agreement to learn how your interest rate gets applied to your account. You can use the Discover Credit Card Interest Calculator to find out how long it will take you to pay off a credit card with interest fees.
How do credit card rewards work?
Many credit cards offer rewards like cash back rewards or Miles. Generally, you earn rewards as a percentage of your purchases, such as 1, 2, or 5 percent cash back.
You can usually redeem your rewards for a statement credit on your credit card account, gift cards, or merchandise, based on your cardholder agreement. Although Discover rewards never expire,1 some credit card issuers offer rewards that may expire.
Credit cards vs. debit cards
Many people have a debit card before they get their first credit card. Although they may look the same, credit cards and debit cards have some important differences in the way they work.
A credit card lets you borrow money, but a debit card is connected to an account where you have cash. The debit card doesn’t let you borrow money, but lets you buy things without physically carrying cash around. When you pay with a debit card, the bank withdraws funds from your account as soon as you complete the transaction. Additionally, credit cards may come with benefits and features that debit cards do not offer.
Choosing the best credit card for you
Two good options when it comes to getting your first credit card are student credit cards and secured credit cards. Secured cards require that you make a security deposit up front equal to your credit limit; otherwise, it works similarly to a unsecured credit card .
Learning how to use either a student credit card or a secured credit card responsibly can help you establish the good habits that will build your credit over time, which is an important part of learning to manage your financial life—both now and in the future.
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