Credit cards are everywhere; you might even have one in your wallet right now. By mid-2024, people in the U.S. will have opened around 600 million card accounts. Most people use them to pay for groceries, book flights, or make online purchases. But do you know how they work or why they’re helpful? What are credit cards exactly? Let’s cover some basic yet important credit card information.
KEY TAKEAWAYS
- A credit card lets you borrow money from a bank or issuer to pay for things you buy.
- You’ll need to repay the borrowed amount, often with interest, if not paid off by the due date.
- Credit cards come in various types, including reward cards, student cards, and more.
- They’re handy but can lead to debt if not used responsibly.
What Is a Credit Card?
Think of a credit card as a buddy spotting you some cash when you’re short, but with strings attached. A credit card allows you to borrow money up to a set amount, known as your credit limit. You use it to make purchases, pay bills, or even withdraw cash. But here’s the deal — you’ll need to pay back the borrowed money, and if you don’t pay it all on time, you’ll get charged interest.
How Do Credit Cards Work?
A credit card is a type of short-term loan. When you use it, the credit card company pays the merchant on your behalf. Then, at the end of your billing cycle — usually a month — you’ll receive a statement listing all your purchases, along with the total amount you owe. If you pay less than the full amount, the remaining balance will carry over, and interest will be charged on it.
All credit cards, even the world’s most exclusive credit cards, work the same way. Let’s say your card has a $1,000 credit limit. You spend $200 on groceries and $50 on fuel. By the end of the month, you owe $250. If you pay the full $250 before the due date, you’re golden — no extra fees. If you just pay $150, you’ll owe interest on the remaining $100. The interest adds up so fast, so it’s always better to pay in full.
Many cards also offer a grace period — usually around three weeks — during which you can pay off your balance interest-free. Most credit cards have an annual percentage rate (APR) from 20% to 30%, depending on your credit score and the type of card. That’s how a credit card works.
Types of Credit Cards
Credit cards come in many forms to meet different needs. Let’s go through the most common ones:
Reward Credit Cards
Reward credit cards give you a little something back each time you spend, typically in the form of cash back, points, or travel miles. You can then redeem those rewards for discounts, gift cards, and additional perks, such as miles.
A 2023 survey found that 55% of reward credit card holders chose cash back or gift cards, 16% enjoyed free hotel stays, and 13% redeemed free flights.
As long as you pay your full balance each month and avoid interest charges, you can take advantage of reward credit cards big time.
Balance Transfer Cards
If you’re juggling high-interest debt, a balance transfer card can help by letting you move that debt onto a card with a lower rate, often 0% for up to 21 months. This grace period can ease the burden and speed up your payoff progress.
An Experian survey found that 57% of people got balance transfer cards to take advantage of perks like interest-free periods or no-fee transfers. Another 35% used them to combine multiple debts.
Just keep an eye on the transfer fee, which typically ranges between 3% and 5% of the amount you transfer.
Student Credit Cards
Student cards offer an easy entry point into credit for those just starting out, with 85% of college students owning at least one credit card.
These cards generally have lower limits, less than $1,000, to keep spending in check. Some even sweeten the deal with small rewards or no annual fees at all.
Most importantly, they can help young people develop good financial habits and begin building a solid credit history.
Secured Credit Cards
Secured credit cards can help those who need to build or rebuild their credit score. Cardholders will provide a security deposit — equal to 50% or 100% of the credit limit — which serves as collateral (and sets the credit limit if it’s 100%)
When you use the card responsibly and make timely payments, you can build your credit over time, making you eligible for an unsecured credit card.
Business Credit Cards
The U.S. Small Business Administration reports that approximately 34% of small businesses use credit cards to finance their operations.
Business credit cards are for entrepreneurs and freelancers who want to keep their finances organized as their ventures grow. This way, people in business can separate work-related spending from personal expenses and earn rewards like cash back and points.
Credit Card Debt
Credit card debt can sneak up on you faster than you think. One minute, you’re tapping away; the next, you’re juggling minimum payments and watching interest rack up. In fact, since mid-2021, America’s total credit card debt has leaped more than 50% compared to three years ago.
The silver lining? A few smart strategies can help you avoid getting into debt in the first place.
Here’s what to keep in mind to avoid getting into debt:
- Treat your credit card like a debit card — only charge what you know you can pay in full by the due dates. This way, you avoid interest altogether.
- Set up reminders or turn on autopay to cover at least the minimum amount each month.
- Think of your credit limit as a safety net, not a spending goal. Just because your card has a $7,000 limit doesn’t mean you should use it to its maximum.
- Keep your credit card for true emergencies, like unexpected medical bills or car repairs, and have a separate budget or savings plan for everyday expenses.
- Pay more than the minimum. Even an extra $50 per month can reduce how long it takes to pay off your credit card debt.
Pros and Cons of Credit Cards
Credit cards can be powerful financial tools — but like any tool, how you use them makes all the difference.
Pros of Credit Cards
First, let’s break down the advantages:
- Build Credit: Paying your credit card bill on time and keeping the balance low helps lift your credit score. A better score makes it more likely you’ll land better interest rates on loans, mortgages, and even new credit cards later on.
- Rewards and Perks: Many credit cards offer incentives like cash back, travel miles, or discounts on everyday purchases. You might earn between 3% to 5% back on groceries, gas, or dining out, while premium cards often include extras such as travel insurance, free checked bags, or lounge access at airports.
- Emergency Access to Funds: Unexpected expenses, such as car repairs or medical bills, can strike at any time. Having a credit card provides a temporary safety net. It’s not a substitute for an emergency fund, but it can help you handle urgent costs until you’re able to pay them off.
- Fraud Protection: Credit cards offer strong security features. If your card is lost or used without your permission, you can report it to your issuer, who will typically reverse fraudulent charges and send you a replacement card. This offers peace of mind when shopping online or traveling abroad.
Cons of Credit Cards
Consider the potential pitfalls too before deciding to use one:
- Interest Costs: If you don’t pay your balance in full each month, you’ll be charged interest that can quickly add up. With an average APR of 25%, carrying a balance can make your purchases much more expensive over time.
- Fees: Credit cards can carry different fees, including annual fees, balance transfer fees, late payment fees, and foreign transaction fees. These costs can sneak up on you if you’re not careful to read the terms and conditions.
- Debt Risk: Credit cards make it easy to overspend, especially if you carry high limits. Before you know it, you could end up in a cycle of debt, paying off only the minimum balance and watching your debt grow due to interest.
- Impact on Credit Score: While credit cards can help build your score, they can also hurt if you miss payments, max out your credit limit, or carry a high balance. Make sure you monitor your credit utilization and payment history to avoid damaging your score.
Credit Cards FAQ
What Is a Credit Card, in Simple Words?
A credit card allows you to borrow money to make purchases now and pay back later. If you pay the full balance by the due date, you avoid interest charges. However, if you only pay part of the balance or miss the payment, you’ll owe interest and possibly late fees.
What Is the Difference Between a Credit Card and a Debit Card?
A credit card is borrowed money you pay back later, often with interest if not repaid in full. A debit card, on the other hand, is your own money withdrawn directly from your bank account.
What Happens If I Don’t Pay My Credit Card?
When you don’t pay your credit card:
- Interest will start to grow daily on your unpaid balance.
- Missing payments will result in extra charges.
- Your credit score will drop, making it harder to get loans or credit in the future.
- After a prolonged non-payment, your account could be sent to debt collection, and you may find yourself in legal action.
Sources
- Federal Reserve Bank of St.Louis. “Commercial Bank Interest Rate on Credit Card Plans” Fred. Accessed April 27, 2025.
- CreditCards.com. “Poll: Americans Are Sitting on Billions in Unused Credit Card Rewards.” CreditCards.com. Accessed April 29, 2025.
- Discover. “Student Credit Card Limits 101.” Discover. Accessed January 29, 2025.
- U.S. Small Business Administration. “Small Business Finance FAQs 2024.” SBA. Accessed April 28, 2025.
- U.S. Bank. “Use Your Credit Card Wisely to Steer Clear of Debt.” U.S. Bank. Accessed April 29, 2025.