How Credit Cards Work: A Guide to This Important Financial Tool

Many Americans carry credit cards with them, but might be wondering how credit cards work. From interest, balances, grace periods, and credit scores, there is an abundance of information to know about credit cards in order to be well-versed.

Why We Wrote This Guide

A person’s credit history, credit score and credit card habits can impact their personal and professional lives in a number of ways. Not only may credit history be part of the criteria used to determine approval for auto, home or student loans, lines of credit or credit cards (and the fees, finance charges and terms and conditions associated with them), but also credit history may play a role in where a person can rent housing or work. Despite that, many people are never taught the basics of credit, including how credit cards work.

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At Discover, we put our customers first, and we demonstrate that commitment in our products and our services. We also understand that many people haven’t learned how credit cards work — or how they can be used the right way to make your financial life more convenient.

Here, you’ll learn some important information we feel all customers deserve to know about credit cards, including:

  • The basics: simply, how credit cards work and what information you need to know to use them well.
  • The credit card terms cardholders should understand to find the right card for their needs
  • How your credit card use may impact your credit score and history (and why it matters)
  • How to make sense of the important information in your cardholder agreement, and on your credit card statement
  • How to avoid potential fees and finance charges related to various credit card transactions
  • How to take advantage of all the benefits credit cards can offer
  • How to help protect yourself from credit card-related fraud

In short, we want you to feel confident that you are capable of using credit cards in a way that enhances your financial life.

Why Having Good Credit Matters

If you have products that allow you to “buy now, pay later” (which may include your credit cards or accounts that designate you as an authorized user; a car lease or loan; student loans; or, in some cases, utility bills), then you probably have a credit report.

Having good credit still matters, even if you have no intention of using credit cards to pay for purchases or applying for a mortgage in the near future.

What’s APR (and Why Does it Matter to Credit Card Customers)?

We mentioned that people who have good credit may be offered more competitive loan or credit terms than a person with bad credit. That interest rate is often referred to as the APR. Because the APR refers to the annual percentage rate, credit card companies usually calculate finance charges using the daily periodic rate, which is based on the APR — card issuers typically divide the APR by 365 (sometimes 360) to calculate the daily periodic rate.

When you use a credit card to buy an item, the creditor pays the merchant on your behalf. When your monthly credit card statement arrives, you’ll see the amount(s) you charged on your credit card account during the statement period, along with any remaining balance from the month(s) prior.

What You Need to Know to Use Your Card Wisely

When you understand the ins and outs of how credit works, you’ll benefit from the conveniences (and potential rewards) credit cards may offer, while avoiding the fees and finance charges that make balances difficult to pay down.

Almost half of all consumers carry multiple credit cards. In fact, the CFPB estimates that the average consumer has four of them. 5

What Happens When You Make a Payment (or Miss One)

If You Pay by the Payment Due Date

Your credit card statement indicates the date your payment is due; the credit card issuer must receive your payment by that due date. Whether you use automatic bill payment online or snail mail, allow plenty of time for the payment to arrive by that date.

Your credit card payments are indicated on your credit report each month. The longer your credit history reflects consistent on-time payments, the more it could benefit your credit score.

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10 Tips for Using Your Credit Card

  1. If you have a chip-enabled credit card, insert the card chip-first, face-up at merchants who are equipped with EMV terminals when it’s time to pay. This technology offers greater protection when used at chip-enabled terminals or ATMs.
  2. Take advantage of online banking so you’re aware of your credit card activity, including your card balances and transaction amounts, and so you can manage your own use and spot any suspicious activity.
  3. Sign up for automatic payments in at least the minimum amount due for your credit cards to eliminate the possibility that you’ll ever miss a payment.
  4. Never send your credit card number (or any sensitive financial information) over unsecured email.
  5. Sign up for account alerts that you’ll find valuable, such as payment due date reminders and large purchase amounts.
  6. Use your credit card to reap the benefits it offers — but don’t charge more than you can afford to pay in cash.
  7. Keep on top of your credit score and check it as often as you can to know where you stand.
  8. Keep your oldest credit card accounts open and active — and don’t apply for too many credit cards in a short time period.
  9. Keep your issuer’s customer service number accessible in case you ever lose a credit card or have other questions.
  10. Always read the terms and conditions for any credit card you’re considering applying for, and review your monthly statements.

Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

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