What is a Credit Card: How does It Works?


What is a Credit Card?

The credit card gives power to the account holder to make payments from the money which really doesn’t exist in their account within their credit limit. That borrowed amount must be paid back in full each month, or interest will be charged.

A credit card is typically a physical card (plastic or metal) issued by a bank or other financial institution that provides a facility to borrow funds that can be used to pay for any purchases of goods and services with merchants that accept credit card payments.

All charges are subject to be paid back within a specific amount of time usually a month. If the money borrowed is not paid back by the time, interest will be charged. Credit card borrowing limits vary and depend on the credit score or credit history of the account holder. 

Credit cards come with the condition that cardholders must pay back the borrowed money, plus any interest if applicable or any additional agreed-upon charges, either completely by the billing date or over time.

Other than the standard credit card services some card issuers also provide the facility of a separate cash line of credit (LOC) which enables borrowing money in the form of cash advances that can be used through bank tellers, ATMs,s or credit card convenience checks. These cash advances have different terms, such as it come with no grace period and a higher interest rate in comparison with that transaction that comes within the credit line. Card issuers preset borrowing limits based on an individual’s credit rating and score. In today’s time, a vast majority of businesses let customers make payments with credit cards, which makes it one of today’s most popular payment methods for buying goods and services.

So, Credit Cards:

  • Are metallic or plastic cards that are used for borrowing funds that can be used for all types of payments and services with merchants?
  • Charge interest on the money spent, if the money borrowed is not paid back by the billing date.
  • May be issued by banks, stores, or other financial institutions and often like cash gives offers like cash back, discounts, or reward miles.
  • issuer sometimes also grants a separate cash line of credit (LOC) to cardholders, which enables credit card holders to borrow money in the form of cash advances.

How do credit cards work?

Credit cards are used for all types of transactions, such as in person or online over a phone or directly at a store or any place where a credit card facility is provided. Credit cards can also be used for cash advancement at an ATM or through bank tellers although the charges are very high, so this is not usually recommended unless it’s an emergency. 

A credit card has a credit limit, so you need to ensure that you stay within that amount and pay it off each billing cycle to get that facility back. If you do not pay off the full balance by the due date you will be charged interest (except in cases where there is a 0% APR introductory offer in place for an initial period of time after account opening) that will continue to accumulate until the balance is paid off in its entirety. Interest rates for a credit card are quite high usually around 20%. Credit cards typically charge a higher annual percentage rate (APR)  vs. other forms of consumer loans. Be aware while using a credit card improper use of your credit card could lead to other charges and penalties as well.

For every billing cycle, credit card holders will be given a credit card statement that shows what they have spent and how much they need to be paid, and by when. This is important as you can keep track of your spending while keeping on top of payments. It’s good practice to go over your statement every month so that you can ensure that everything is correct and to catch any potential fraud or erroneous charges early.

In the section on terms and conditions for a specific credit card, you can find complete rules about cash advances, interest rates, late fees, billing statements, and other important policies. It’s preferable to go through all these T&Cs and even get a copy of these rules with your physical card.

By law, credit card issuers must provide a grace period of at least 21 days before imposing interest on purchases. Paying off balances before the grace period expires is a good practice and only be delayed when it is not possible. It is also important to know whether the credit card issuer accrues interest daily or monthly, as this leads to higher interest charges for as long as the balance is not paid. This becomes more important to know if you’re thinking to transfer your credit card balance to a card with a lower interest rate. Intentionally or Mistakenly switching from a monthly accrual card to a daily one can potentially blank all the savings from a lower rate.

Key Takeaways:

  • Credit cards can be used for all types of transactions if a facility is provided.
  • The credit card has a limit, on the amount you can spend and need to pay back within the billing cycle. 
  • Credit card interest rates are quite high. So, make sure to pay off the full balance by the due date.
  • Every billing cycle provides full credit card statements to keep track of your expenditures.
  • It’s a good practice to pay off the balances before the grace period expires.

How do credit cards differ from other payment cards?

Let’s see what charge cards, debit cards, and prepaid cards are and what is the difference between these and credit cards.

Charge Card

A charge card comes with the same facility as a credit card with an additional benefit of uncapped spending limits and offers by a limited number of issuers. It charges no interest but requires that you pay the statement balance in full, usually monthly but typically charges a high annual fee.

Debit Card

A debit card is a bank card tied to your bank account, where every payment you make directly debits the money from your available balance in the account, so the money charged to the debit card is actually your money, not borrowed one. In order to use a debit card, the balance must be available in your bank account, or it may result in an overdraft.

Prepaid Card

Unlike a debit, credit, or charge card where money needs to be available in the account or can be paid back after some time, a prepaid card needs to be loaded first with your own money. So, you can only spend that much money which is available on your prepaid card or which you have loaded in the first place after that you have to reload it in order to spend more.

Pros and cons of credit cards

  • Provide instant money to do purchases.
  • Help you in building your credit score and good credit history.  
  • Provide great convenience to users, especially for all online transactions.
  • Comes with so many great offers such as cash backs, rewards, coupons, valuable points other benefits.
  • Remember a credit card borrows you money which can be an easy way to fall into debt if not used carefully.
  • Comes with high-interest rates that may be imposed if balances aren’t paid each month.
  • Some credit cards also charge annual fees, cash-advance fees, or foreign exchange fees.

How to Improve Your Credit Score Fast?

If you are looking for a way to increase your credit score, consider applying for a credit card.

When you apply for a credit card, the credit card company will review your credit report. This will include your credit score.

Your credit score is a number that reflects your creditworthiness. A high credit score means that you are likely to pay your bills on time and have a low risk of defaulting on your debts.

So, if you are looking to increase your credit score, applying for a credit card can be a good way to start. And, remember, always use your credit card responsibly.

What is a credit card annual fee?

An annual fee is a yearly charge by banks and financial institutions to customers for use of their credit cards. The card issuer adds the annual fee to the customer’s statement.


Credit cards can be a great way to build credit and earn rewards, but they can also be a source of debt and financial stress. If you’re considering getting a credit card, there are a few things you should keep in mind.

  1. Know your credit score. Before you apply for a credit card, check your credit score to see where you stand. If your score is on the lower end, you may want to consider a secured credit card, which requires a deposit that serves as collateral for the card.
  2. Consider your spending habits. Do you tend to spend more when you have a credit card? If so, you may want to reconsider getting one. It’s important to be mindful of your spending and only use your credit card for purchases you can afford to pay off.
  3. Choose the right card. There are a lot of credit cards out there, so it’s important to compare your options and find the right fit. Consider things like the interest rate of the credit card you want and ensure that you meet the qualifications. Some of the premium credit cards, especially travel rewards credit cards, have high minimum annual income requirements.


What are 3 types of credit cards?

There are 3 major types of Credit Cards. These are:

  • Reward Credit cards
  • Low Interest and Balance transfer credit cards
  • Credit building cards
What is the use of credit card?

A credit card is used for borrowing money which allows you to make purchases and pay for them later.

What type credit card is best?

what type of credit card is best is completely depends on your needs and what you want from a credit card.

What is the number 1 credit card?

Chase is arguably the top credit card issuer in the U.S., both in terms of purchase volume and card volume. Chase holds the largest share of the market in purchases and comes in second for a number of cards


Please enter your comment!
Please enter your name here