Put simply, a credit card is a type of loan: the bank or credit card issuer extends you a line of credit — money that you otherwise would not have. In exchange, you pay them back by the monthly payment due date. If you pay off your credit card account in full and on time every month, you may not be charged interest on purchases depending on the terms of your account.

Credit card debt is typically unsecured debt, because for a traditional credit card you do not have to put up any collateral or property to receive the funds. The bank or credit card issuer, in approving you for the credit card, has judged you to be creditworthy, meaning that you can be counted on to repay the money you’ll borrow.

Credit Cards Explained

If your credit card payments extend over time, you will be charged interest, which is where that APR, or annual percentage rate, term you’ve probably heard comes into play. While credit cards give you the flexibility to take your time paying back what you owe, you will pay for the privilege of doing so. Each month that you carry a balance, you will be charged interest.  Make use of Discover’s Credit Card Interest Calculator to calculate the payoff time for any credit card.

And, each month, you will have the option of making the minimum payment due (as determined by your credit card issuer), a larger payment, or payment in full. Making timely payments is the first good credit card habit you’ll want to adopt, because “payment history” makes up the largest percentage of your three-digit credit score.

As you become more comfortable with using a credit card, you’ll also want to make a habit of keeping your overall utilization low. The “credit utilization rate,” which is another important factor in your credit score, is the amount you owe compared to your total credit limit.

How Does Credit Card Interest Work?

If you do not pay your statement balance in full each month, you will be charged interest on purchases. If you take a cash advance or balance transfer, you may be charged interest from the date the transaction posts to your account, which is where that APR, or annual percentage rate, term you’ve probably heard comes into play. While credit cards give you the flexibility to take your time paying back what you owe, you will pay for the privilege of doing so. Be sure to check the terms of your cardmember agreement to learn how interest will be applied to your account. Make use of Discover’s Credit Card Interest Calculator to estimate the payoff time for any credit card.

How Does Your Credit Card Usage Affect Your Credit Score?

Each month, you will have  to pay at least the minimum payment due (as determined by your credit card issuer), a larger payment, or payment in full. Making timely payments is the first good credit card habit you’ll want to adopt, because “payment history” makes up the largest percentage of your three-digit credit score.

As you become more comfortable with using a credit card, you’ll also want to make a habit of keeping your overall utilization low. The “credit utilization rate,” which is another important factor in your credit score, is the amount you owe compared to your total credit limit.

How Do Credit Card Rewards Work?

Many credit cards offer cash back rewards, miles rewards for travel, or points rewards. Generally, you earn rewards as a percentage of your purchases, such as 1%, 2% or 5% cash back.

You can usually redeem your rewards for a statement credit, gift cards or merchandise, as specified in your cardholder agreement. Although Discover rewards never expire*, 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’ve deposited funds. The debit card doesn’t let you borrow money, but lets you buy things without carrying cash around. When you pay with a debit card, the funds are withdrawn from your account as soon as you complete the transaction.

Credit cards may come with benefits and features that debit cards do not offer.

Choosing the Credit Card that Works Best for You

Two good options, when it comes to getting your first credit card, are a student credit card and a secured credit card. The secured credit card requires that you make a security deposit up front that will equal the amount of your available credit; otherwise, it works similar to an 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.

Published August 30, 2017

Updated December 16, 2021

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.