Table of Contents

What Is a Credit Card?

It works just like a debit card, but it can impact your credit score more.

Why You Can Trust CNET Money
CNET Money’s mission is to help you maximize your financial potential. Our recommendations are based on our editors’ independent research and analysis, and we continuously update our content to reflect current partner offers. How we rate credit cards
Eugene Mymrin / Getty images

Credit cards can help you build credit, thwart fraudulent charges and earn rewards or cash back. But before you apply, it’s good to understand exactly what a credit card is and how it works. This will help you avoid some common pitfalls of using credit -- from taking on costly high-interest debt to hurting your credit score.

The ins and outs of credit cards vary depending on the type of card, the issuer and other factors. But a few credit card basics can help you prepare to use credit responsibly.

Here’s more about what exactly a credit card is, how it works and what to know before you apply:

What is a credit card?

Credit cards are embedded with a 15- or 16-digit number that lets you make purchases in-person or online. Banks offer credit cards as a type of loan with a revolving line of credit. You can make purchases with your credit card just like with a debit card, but instead of the amount being subtracted from your bank account, you are borrowing the funds against your credit limit from the bank. And as with any loan, you’ll have to pay that money back according to set terms. 

When you’re approved for a credit card, you’ll be assigned a credit limit. You can spend up to that amount, and pay the balance down over time. As long as you pay your balance fully each month, you won’t have to pay interest on the amount you charge.

You’ll have the flexibility to make purchases now and pay for them later. “Using a credit card is essentially getting a loan from the bank,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. But unlike with most personal loans or even mortgages, you can avoid paying interest or late fees altogether by paying your full balance every month.

How does a credit card work?

Credit cards are issued mainly by banks and credit unions. Credit cards operate on four major payment networks: American Express, Discover, Mastercard and Visa.

Companies often partner with banks to issue their own credit cards, known as co-branded credit cards. Most airlines, hotels and major retail stores have co-branded cards.

Credit card purchases work much like debit card purchases. You’ll only be able to spend up to your credit card limit, although you should avoid spending close to the limit. Keeping your credit card utilization -- or the amount of available credit compared to your balance -- low is one of the most impactful ways you can help your credit score. 

After you make a purchase, it’ll be added to your credit card balance -- the amount of money you owe the credit card company. Credit cards have monthly billing cycles, so each month, you’ll receive a statement with your balance due and the due date. If you don’t pay your balance in full each month, you’ll accrue interest on the remaining balance until your debt is paid in full. Keep in mind that credit card interest accrues daily and can add up quickly -- and at 17.3%, according to the Federal Reserve, the average credit card APR is far higher than you’ll see on other types of loans like a mortgage, student loans or even many personal loans. And even though it’s not a good idea to accrue interest, you’ll be able to carry a balance if you need to. With a charge card, however, you must pay the balance in full each month.

Depending on your card, you may also earn rewards on your credit card purchases. Your rewards will appear on your credit card statement and your card’s online account. And you may be able to redeem the rewards toward statement credits, travel, gift cards or cash back. But redemption options all depend on your credit card. 

Read more: Credit Card Pros and Cons: What to Know

Credit card terms to know

  • APR/Interest rate: Your credit card APR -- or annual percentage rate -- is the interest rate expressed in annual terms. The APR represents the percentage you’ll pay on any revolving debt. Credit cards charge very high interest rates -- many are above 10% and can go as high as 25% or even more. The better your credit score, the lower your APR. 
  • Balance: Your credit card balance is how much you owe the credit card issuer. If you carry an outstanding balance, this amount will include interest. It’s best to pay your balance in full and on time each month to maintain a good credit score and avoid paying interest.
  • Cash advance: cash advance lets you get cash by using your credit card at an ATM or bank. You’ll have to pay your cash advance back, and most require a fee. Most credit card issuers also have a cash advance limit. 
  • Credit limit: Your credit limit is the maximum amount you can spend with your card. But whatever your limit is, experts warn against borrowing money up to the limit or even anywhere near it. Experts recommend keeping your credit utilization below 30% to seem less risky to issuers and lenders. Maxing out a credit card -- especially if you can’t pay it off in full -- can be damaging to your credit score and credit history, and lead to snowballing debt that can be increasingly difficult to pay off later. 
  • Minimum payment: The minimum payment is the portion of your overall balance you’ll need to pay to keep your account current and avoid penalties. While the minimum payment is all you must pay by your monthly due date, paying your balance in full each month instead is key to avoiding high-interest debt. 

How to use a credit card

Credit cards can be a great way to build your credit score when used properly. Consistently paying off your credit card in full and on time each month will help improve your credit score over time, said John Ulzheimer, a credit expert formerly of FICO, Equifax and Credit.com.

That really is the best way to use a credit card -- as an extension of your bank account. Ulzheimer believes a card’s annual percentage rate (APR) should be irrelevant. “If the most important metric you’re looking at when you compare credit cards is the interest rate, I would almost suggest you’re looking at the wrong product,” he said. You shouldn’t go into a relationship with a card issuer expecting to carry a balance. In that case, he suggests a debit or charge card that must be paid off each month as better options.

Credit card rewards programs can be another great benefit to using credit cards, offering things like cash back or money toward travel and other expenses. But before you worry about points and rewards, experts say it’s important to develop a healthy relationship with credit cards that includes paying down your balance in full and on time each month. Many credit cards also have other perks, like extended warranty benefits or built-in rental car insurance. So your credit card could save you money in more ways than you may realize.

How to get a credit card

If you’re considering opening a credit card account, you should know your credit score and credit history before you apply. Credit cards with the most valuable perks and rewards often require good to excellent credit, while some cards, like a secured credit card, are designed for building credit and have less-strict requirements -- and also fewer perks and rewards. 

Next, determine what type of credit card you want. A cash back credit card that offers rewards on everyday spending is likely a better starter card than a balance transfer card for paying down debt. Compare rewards categories among a few cards to ensure they align with where you spend most. Also, consider when you’ll want to apply. If you’re planning a summer vacation or home remodel, you may time your application to take advantage of a welcome bonus and earn additional rewards. 

Whichever credit card you pick, use it responsibly and practice good credit habits. When you’re approved, read the fine print to understand your agreement, any fees and other terms. Contact your issuer if you have any questions about the card, application or qualifications.

Remember, it’s best to only apply for one card at a time to reduce the risk of hurting your credit score or approval odds. If you’re denied, ask the issuer to provide a reason, and consider taking time to improve your credit before applying again or applying for a different credit card with better approval chances. 

Read more: How to Apply for a Credit Card and Get Approved

The bottom line

A credit card can be a good way to build credit or earn rewards on your purchases. But it’s best to do your research and understand credit card basics to learn the ins and outs and use your card responsibly from the jump. Credit cards are useful financial tools for building credit, but they can quickly become a burden if you don’t use them properly.

Correction: An earlier version of this article was assisted by an AI engine and it misstated the length of the credit card billing cycle. That point was corrected. This version has been substantially updated by a staff writer.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.

The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.

Dashia is a staff editor for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.
Jason Stauffer is a personal finance reporter who previously covered the housing and mortgage market for NextAdvisor, and travel, credit cards, miles and points for The Points Guy, Million Mile Secrets and CNBC. He is a graduate of Shippensburg University, where he studied finance.
Advertiser Disclosure

CNET editors independently choose every product and service we cover. Though we can’t review every available financial company or offer, we strive to make comprehensive, rigorous comparisons in order to highlight the best of them. For many of these products and services, we earn a commission. The compensation we receive may impact how products and links appear on our site.