The offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money.

How do credit cards work? A beginner's guide

How do credit cards work? A beginner's guide·Yahoo Personal Finance

Imagine you're standing at the checkout counter, and instead of just paying for your items, you could also earn something back. That's the magic of credit cards.

Not only do they let you buy that must-have item, but they can also reward you for spending and help you build a solid credit history.

Whether you're eyeing rewards or looking for flexibility in payments, understanding the ins and outs of credit cards is your ticket to smarter spending.

How do credit cards work for consumers?

Credit cards allow users to borrow money up to a certain limit to purchase items or withdraw cash, which they will pay back (typically) with interest to the card issuer.

Though the transaction is swift, the process of using a credit card is more intricate than swipe, pay, repeat.


When you apply for a credit card, the bank or card issuer assesses your financial history, income, debt-to-income ratio, and other factors. If deemed creditworthy, they approve your application and provide you with a credit card. This initial assessment helps the card issuer set your credit limit and interest rate, ensuring you're given a card that matches your financial standing.

Credit limit

Once approved, you're assigned a credit limit, which is the maximum amount you can borrow on the card. This limit acts as a safety net, preventing excessive borrowing and aiding in spending control.

Making purchases

With your credit card in hand, you can make purchases by swiping, tapping, or inserting your card. Each transaction borrows funds from your credit limit. Credit cards offer flexibility in handling immediate expenses, allowing you to spend without having cash on hand.

Monthly statement

At the close of each billing cycle, the card issuer sends you a statement detailing your transactions, total balance, interest (if any), and the minimum payment due. The statement is your monthly financial snapshot, helping you understand and manage your expenses, ensuring you're aware of what you owe.


Your credit card statement will indicate a due date by which you should pay at least the minimum amount owed on your credit card balance. Regular, timely payments are required to prevent late fees and contribute positively to your credit history. Ideally, you'd pay off the full balance to avoid interest. However, some cards, like the Chase Slate Edge℠ credit card, have intro offers with 0% APR for a set amount of time (18 months for Chase Slate Edge℠), helping you to avoid any interest charges if you need more than a month to fully pay off a large purchase.

Interest and balances

If you don't pay off the entire balance, the card issuer will charge interest on the remaining amount. This interest compounds, which means over time, you'll owe more. Interest is a headache for many credit card users. Carrying a balance and accruing interest can quickly balloon the amount you owe, making it harder to pay down your debt.

Rewards and benefits

As you use your credit card, you may earn rewards. Depending on the card, after making a purchase in an eligible category, your points, miles, or cash back are tallied. These rewards are typically available for redemption or use in the next billing cycle. Credit card benefits can add significant value to your card usage. Whether you're getting cash back or saving up for a free flight, these perks make credit cards even more appealing — as long as spending is managed responsibly.

Building credit

Each time you make an on-time payment or refrain from maxing out your card, you're making moves that positively affect your credit score. Regular, responsible behavior can enhance your score over time. A solid credit history unlocks various financial doors. It can lead to better interest rates on loans, higher credit limits, and more favorable terms in various financial endeavors.

Credit cards vs. debit cards

Credit cards and debit cards are not the same. When you use a debit card, you draw directly from your funds in your checking account. When you use a credit card, you’re essentially borrowing from the credit card company, not your bank account.

How do credit cards work for issuers?

Think of this side of credit cards as the behind-the-scenes of what's occurring between you, your credit card, and the company that issues it.

Credit card assignment

Upon approval, a credit card issuer assigns you, the cardholder, a unique credit card number, which serves as a distinct identifier for all transactions. This unique number ensures security during transactions and differentiates individual accounts.


Every time you swipe or insert your credit card, a validation process starts with the card issuer. This protects cardholders and merchants by preventing fraud and checking how much available credit you have.


Post-authorization, the details of the transaction pass through a network for further validation, ensuring transaction accuracy and updating the amount of available credit you have.


Your credit card issuer compiles all your transactions into a monthly statement and delivers it to you via mail or email, depending on your preference. This gives you a transparent record for tracking and budgeting expenses.


Your credit card issuer expects you to pay at least the minimum amount stated in the monthly bill on or before the due date. On-time payments build a positive history with your issuer and establish your creditworthiness.

How does a credit card help you build your credit?

A credit card can help you establish or build your credit by acting as a record of your financial behaviors. Think of a credit card as your financial microphone, amplifying your money habits to the world, or at least to those credit bureaus. Swipe, pay, repeat.

Each timely payment you make is like a mini shout-out, telling the financial world that you have financial discipline and, in turn, can be trusted with credit.

Pros and cons of credit cards

Navigating the world of credit cards is like walking a financial tightrope. Credit cards come with enticing benefits, but a misstep can lead to pitfalls that might challenge your finances and credit score.

Credit card pros

  • Convenient transactions: Simplifies purchases, especially online.

  • Enhanced security: Offers added protection against theft or loss compared to cash (or debit cards).

  • Rewards programs: Opportunities to earn points, miles, or cash back on purchases.

  • Credit building: Responsible use can enhance your credit history and increase your score.

  • Emergency buffer: Can act as a financial safety net in unexpected situations.

  • Special offers: Access to exclusive deals, discounts, and promotional rates.

Credit card cons

  • Mounting interest: Carrying a balance can lead to significant interest charges.

  • Hidden fees: Common credit card fees such as late, annual, or foreign transaction fees can sneak up on you.

  • Risk of debt accumulation: Irresponsible use can lead to unsustainable debt levels.

  • Credit score impact: Late or missed payments can tarnish your credit profile.

  • Potential overspending: Easy access to credit might encourage unnecessary purchases.

  • Complex terms: Some cards come with intricate terms and conditions, making them difficult to understand fully.

Different types of credit cards

The credit card landscape, spanning from Visa to American Express, offers a diverse array of cards, each catering to specific financial needs and preferences.

Whether you're a new student or a seasoned entrepreneur, credit card issuers want your business and have a tailored card waiting to entice you.

Secured credit cards

These cards are a go-to for those with minimal credit history or past credit mishaps. By making a cash security deposit, usually equivalent to the credit limit, cardholders have a safety net. Think of it as a training wheel phase in the credit world. If you've had a financial hiccup, a secured card could be a stepping stone to rebuilding your creditworthiness.

Unsecured credit cards

No initial deposit is required here. Ideal for individuals with a stable credit history, from fair to excellent. With diligent use and timely repayments, these cards can help boost your credit score and improve your credit profile.

Student credit cards

Custom-made for the college crowd. These cards often offer unique perks, like cash back on textbook purchases or dining.

Store credit cards

Big fan of a particular brand or store? Retailers issue store credit card cards, often enticing shoppers with exclusive discounts, early access to sales, or loyalty points.

Rewards credit card

Who doesn't love a bonus? With a rewards credit card, every purchase can earn cash back, points, or even special perks.

Business credit cards

Tailor-made for the entrepreneurial spirit, these cards cater to business-related expenses, offering rewards that make sense for professionals, like cash back on office supplies or travel rewards for business trips.

Travel credit cards

For those bitten by the travel bug. Whether jet-setting for business or leisure, these cards often reward travel-related expenses with travel credits, exclusive airport lounge access, travel insurance, credits toward TSA PreCheck or Global Entry, and more.

Who needs a credit card?

Just about everyone can find tangible perks to having a credit card. If you make frequent purchases, aim to bolster your credit, or love cash-back rewards, a credit card might be right up your alley.

  • Daily purchasers: If you're regularly buying groceries, gas, or shopping online, a credit card can provide ease and security. Some common examples include using a credit card for groceries, gas, and monthly subscriptions. Both the Chase Freedom Flex® credit card and the Chase Freedom Unlimited® credit card allow you to earn 5% cash back on combined gas station and grocery store purchases on up to $12,000 spent in the first year.

  • Credit builders: Looking to buy a home in the future? A credit card can help you establish a credit history and gradually build credit for a home loan.

  • Reward seekers: Love the idea of getting a bit back from what you spend? Credit cards often offer cash back, miles, or points.

How to choose a credit card

Start by identifying what you want from a card: Is it rewards? Low interest? A first credit card, or perhaps for building credit?

Next, compare:

  • Annual fees

  • Interest rates

  • Reward structures

  • New cardholder bonuses and introductory offers

  • Cash advances

  • Annual percentage rate (APR)

Keep in mind that selecting a credit card is highly personalized, and your decision should be influenced by your financial needs and lifestyle. Let’s look at how two contrasting lifestyles can lead to different card choices.

Scenario 1: The college student

For a young student just stepping into the world of credit, their priorities might lean towards:

  • Building credit: Opt for a card that reports to all three major credit bureaus to help establish a credit history.

  • Low annual fees: As a student, you'd likely prefer cards with minimal or no annual fees.

  • Student benefits: Some cards offer cash back on textbooks or other student-specific perks.

Scenario 2: The globetrotting professional

An established professional with a passion for travel would have a different set of criteria for their credit card:

  • Travel rewards: Seek cards offering generous air miles, hotel points, or travel insurance benefits.

  • Higher credit limits: A stable financial history may allow for a card with a higher spending limit.

  • Exclusive perks: Access to airport lounges, no foreign transaction fees, or concierge services can elevate the travel experience.

In both scenarios, comparing interest rates, understanding the reward structures, and reading the terms and conditions are essential. Tailoring your card choice to your unique situation ensures you get the maximum benefit with the least drawbacks.

How to apply for a credit card

Insert Image (info image) on the steps of the application and the personal info needed to apply

Thankfully, applying for a credit card is a straightforward process once you decide on the card you want

  • Online application: Most issuers allow for online applications. Simply visit the credit card's official website and look for the "Apply Now" button.

  • Fill out the application: This will involve providing various personal and financial details. (we’ll discuss below)

  • Credit check: Upon submission, the issuer will typically perform a credit check to determine your creditworthiness.

  • Approval or denial: Depending on your credit history and the issuer's criteria, you may be approved instantly or might have to wait for a decision. In some cases, further documentation or information might be required.

What information do you need to apply for a credit card?

  • Full name

  • Date of birth

  • Social Security Number

  • Address(es) (and duration at each address)

  • Employment details, including income

  • Phone number and email address

  • Housing status (own or rent, and monthly housing payment)

Top 3 things to know about credit cards

If you’re thinking that credit is temperamental, you’re not wrong. Credit cards have a direct correlation to your credit report so they are intentionally nuanced. However, there are some best practices to follow that can help you succeed when using a credit card.

Don’t apply for too many (all at once)

Be strategic with how you apply for credit cards. Too many inquiries in a short amount of time can hurt your credit score — and each hard credit inquiry can take up to two years to fall off your credit profile. Lenders may also see you as a potential risk and think you're desperate for credit.

Keep your credit utilization below 30%

Avoid the urge to max out your credit card if at all possible. The rule of thumb is to use no more than 30% of your given line of credit at a time. Maintaining a low credit utilization rate reflects responsible financial habits and can boost your credit score.

Pay off your balances every month

Credit cards are notorious for having some of the highest interest rates. To avoid these, pay off your credit card consistently each month. Consistently clearing your balance demonstrates good credit management, and can strengthen your credit profile. But if you’re unable to pay it off completely, attempt to at least pay more than the minimum payment amount.

Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn't include all currently available offers.