The vast majority of Americans have at least one credit card in their wallets. But what exactly are credit cards? They are revolving lines of credit that allow you to make purchases without using physical cash.
In 2021, consumers used their credit cards for more than 51 billion payments valued at more than $4.8 trillion, according to Federal Reserve data. Credit cards can come with benefits such as rewards and fraud protection, but they can also be risky: A report from the Federal Reserve Bank of New York measured more than $1 trillion in US credit card debt in the third quarter of 2023.
Read on to learn about the different types of credit cards, credit card pros and cons and what to do if you’re thinking about getting a card.
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How a credit card works
When you pay with a credit card, you’re borrowing money from the bank, credit union or other financial institution that provided your card, known as the card issuer.
Whether you’re paying in person or online, your card details travel along a behind-the-scenes information highway set up by credit card networks. Visa, Mastercard, American Express and Discover are the four big names in the credit card payment processing space (the last two also issue cards, serving a dual function). In a matter of seconds, a merchant could receive approval or denial for the transaction.
Credit cards have revolving credit limits, which reflect the maximum amount of debt you can carry at one time. If your credit limit is $1,000, you can spend up to $1,000 on the card. If you spend $200 on the card, you will have access to $800 of your credit limit until you pay off the $200.
Each month, you must make at least a minimum payment, which is usually a percentage of the outstanding amount you owe. If you carry a balance — meaning you do not pay off the full amount you charged to the card before your bill is due — your issuer will begin to charge interest on the unpaid amount.
Your interest rate, also called your annual percentage rate, is usually variable, which means the cost of borrowing can go up or down based on broader economic conditions. Credit cards may have different APRs for different situations, including a purchase APR, a balance transfer APR and a cash advance APR.
But what is a good APR for a credit card? The average APR on credit cards where the user carried a balance was 22.77% as of August 2023, according to the Fed. The best APR on a credit card is 0%, which issuers sometimes offer for a limited time on eligible purchases and balance transfers.
A credit card is not the same as a charge card, which generally requires that the statement is paid in full at the end of each billing cycle and often does not come with a set spending limit.
Types of credit cards
You can choose from a range of credit card options, depending on your credit profile and priorities. Some are only available to individuals with excellent credit, while others are geared toward students or people who have damaged their credit scores. To get a sense of the range of credit card options available, consider these three examples.
What is a rewards credit card?
Rewards credit cards offer a range of benefits beyond basic credit card functions. Those incentives include points, miles or cash back on purchases and, often, welcome bonuses to attract new customers. While premium rewards credit cards such as Chase Sapphire Reserve® and the Capital One Venture X Rewards Credit Card require strong credit, some of the best credit cards for bad credit also offer rewards.
What is a secured credit card?
Secured credit cards require an upfront deposit that typically acts as your credit limit and provides insurance to the issuer if you fail to pay your bill. Secured credit cards can be a good option if you have limited or bad credit. Some cards also review your account after a period of time and may return your deposit and upgrade you to an unsecured account.
What is a balance transfer credit card?
A balance transfer credit card lets you move a chunk — or all — of the money you owe on a different credit card to the card. Typically, you will pay a fee on the amount you transfer. The best balance transfer cards get you an extended period to pay off that balance without racking up more interest. Balance transfers are usually not allowed between two cards from the same issuer.
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How to apply for a credit card
Before you apply for a new credit card, review your credit score to get a sense of the kinds of cards to consider. Also, check to see if the issuers you are considering offer preapproval or pre-qualification. Preapproval and pre-qualification typically involve soft credit pulls, which will not impact your credit, and some issuers may show you multiple options based on your information.
Once you’re ready to formally apply for a credit card, be prepared to hand over details such as your Social Security number or Individual Taxpayer Identification Number, address, birthdate and phone number. You should also plan to share a few basic financial details including your annual income, housing costs and employment status.
Benefits of using a credit card
If you’ve never charged any purchases on a credit card, there are plenty of perks to tapping, swiping or inserting these financial products, including:
- The ability to build your credit: A credit card can help lay the foundation for your long-term financial well-being. By making your payments on time, you’ll be able to establish a pattern of responsible behavior. When you’re ready to ask a lender to borrow more money to buy a car or a house, your credit history will play an essential role in showing that you will pay the loan back.
- A convenient way to pay and protect yourself: Credit cards eliminate the need to find an ATM to withdraw cash or sign a check. Additionally, many credit cards have zero-liability protection, which means you won’t owe any money for properly reported unauthorized transactions. Under federal law, your card issuer may not hold you responsible for more than $50 in unauthorized charges.
- A chance to earn rewards and use perks: If you qualify for a credit card that pays reward points or cash back, you can recoup some of your spending. Additionally, some premium rewards credit cards come with travel benefits such as airport lounge access and credits to cover eligible spending, such as the application fee for Global Entry or TSA PreCheck.
Risks associated with credit cards
If you aren’t careful, credit cards can create challenges in your life, such as:
- The temptation to overspend: The ability to buy now and pay later can complicate your budgeting. Don’t let a high credit limit encourage you to spend more than you would with cash or a debit card.
- Interest and fees: Credit card issuers billed consumers for over $105 billion in interest and over $25 billion in fees in 2022, according to a report from the Consumer Financial Protection Bureau. If you don’t pay your balance in full, you make a late payment or you take other actions that trigger fees, you’re going to feel some of that sting, too.
- Long-term credit damage: While credit cards can help you build your credit, they can also ruin it if you aren’t careful. If you fail to make your payments on time or you wind up in a cycle of debt, your credit score will likely go down — along with your odds of being approved for other types of loans in the future.
Managing your credit card
Before you begin using a new credit card, make sure you have a strategy for maximizing its value and minimizing your potential for overspending.
Margaret Poe, head of consumer credit education at TransUnion, says that begins with two basic steps: making on-time payments and keeping your credit utilization rate as low as possible.
Your credit utilization rate measures the percentage of your credit you are using across all credit lines. You should aim to keep your credit utilization below 30%.
“A long history of on-time payments and a low utilization is a strong signal to lenders that you’re able to manage debt well,” Poe said.
One way to make sure your payments are on time is to set up automatic payments. However, credit card bills can vary widely from month to month, and there are some upsides to taking extra time to review your bill.
“Manually reviewing your credit card statements is a good exercise in budgeting,” Poe said. “You can assess whether your spending matches your monthly financial goals or if you need to adjust.”
Additionally, reviewing all of your transactions can help you spot signs of fraudulent activity. “The earlier you spot signs of fraud, the easier and more expeditious the recovery,” Poe said.
Once you’re doing well managing one credit card, you may be tempted to apply for another to cash in on another welcome bonus and expand your credit limit. But consider a baby-steps approach to the early stages of using credit cards.
“Start building credit by borrowing only what you need,” said Bruce McClary, senior vice president of media relations and membership at the National Foundation for Credit Counseling. “While opening several charge accounts can give you access to more available credit, it can also make it easy for you to accumulate more debt than you can manage.”
Frequently asked questions (FAQs)
No. Some businesses do not accept credit cards, which means you may need to pay with cash or a check. Additionally, some businesses only accept certain types of credit cards.
If you don’t pay your credit card bill on time, you may have to pay a late fee — which may be as high as $41. Additionally, failing to make a credit card payment on time will have a negative impact on your credit score. Your issuer may also start charging a higher penalty APR on your balance.
Yes. A credit card issuer will set a credit limit on your card, which caps the total amount of debt you can carry on the card at any given time.
A credit card balance transfer typically involves moving outstanding debt from one credit card to another from a different issuer. While balance transfers typically come with a fee — 3% of the transferred amount, for example — you may still save money by transferring to a card with a lower APR or a 0% promotional APR.
A credit score is a numerical reflection of your risk level as a borrower. Credit scoring models all function on the same principle: The higher your credit score, the better you look in the eyes of a lender. Using a credit card responsibly by paying your bill on time and keeping your utilization rate low will increase your credit score. On the other hand, carrying large balances or failing to make payments on time can decrease your credit score.
*The information for the following card(s) has been collected independently by CNN Underscored Money: Capital One Venture X Rewards Credit Card. The card details on this page have not been reviewed or provided by the card issuer.
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