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How Credit Cards Work: A Beginner's Guide

Lyle Daly
By: Lyle Daly

Our Credit Cards Expert

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

If you're new to the world of credit, you probably have some questions about how credit cards work. There's a lot to learn when you start using credit cards, and a lack of knowledge can end up costing you money.

This beginner's guide will cover all the credit card basics. You'll learn exactly how credit cards work, how to choose the best first credit card, and plenty of other information you'll need to know about using credit cards.

How do credit cards work?

A credit card is tied to a credit account with a financial institution. When you use the card, you're borrowing money from the credit card issuer. You can use a credit card to purchase goods or services with any merchant that accepts credit cards. Some cards also let you get a cash advance, although this isn't recommended because of the high fees involved.

The amount you owe on a credit card is called the balance. If you make a $100 purchase, your card's balance would increase by $100.

Each credit card has a credit limit, which is the maximum amount you can owe the bank at one time. For example, if your card's credit limit is $1,000, then the balance can't exceed that amount.

LEARN MORE: What Is the Average Credit Card Limit?

The difference between your credit limit and your balance is known as your available credit. Continuing the example above, if your card has a $1,000 credit limit and a $100 balance, the available credit would be $900.

After you make a payment, you have more available credit to borrow again. For that reason, a credit card is considered a revolving line of credit. You can keep using it and borrowing from it, as long as you pay your bill and have credit available.


What is APR?

APR, which stands for annual percentage rate, is the annual cost of borrowing money with a credit card. It's the interest rate the card issuer charges on any outstanding balance after your payment due date.

Fortunately, you can avoid interest charges by paying off your card's full statement balance. If you do that, you won't need to pay any interest on purchases you make.

LEARN MORE: What Is APR and What Does It Mean for Your Credit Cards?

Here's an example of how APR works:

  • Your credit card has an APR of 20%.
  • You have a balance of $1,000.
  • If you leave that balance on the card and don't incur any fees, then it would grow to $1,200 after one year. (20% of $1,000 = $200, added to the amount you owed originally)
  • If you pay off the full $1,000 balance by the due date, there won't be any interest charges.

In reality, you couldn't leave that balance for a whole year. You'd need to make minimum payments every month to keep your account in good standing and avoid fees. That was just an example to explain the concept of credit card interest.

LEARN MORE: How Does Credit Card Interest Work?

How to build credit

After you're approved for a credit card, it's important to use the card in a way that will improve your credit score. Here's what you need to do to build credit with a credit card.

Pay on time

The best thing you can do for your credit is to always pay on time. Your payment history is the most significant factor in determining your credit score, and on-time payments will help you get excellent credit.

Most credit card issuers offer an autopay feature. This is a good way to ensure you never miss a payment. Alternatively, you can set a monthly reminder for yourself.

Watch your FICO? Score

Although there are multiple types of credit scores, the FICO? Score is the one that lenders use most often. You should check yours at least once every few months to ensure you're headed in the right direction. Some credit cards include a FICO? Score tracker, but if yours doesn't, there are also free ways to check your score online.

LEARN MORE: How to Find Out Your Credit Score

Keep your balances low

It's bad for your credit score if your credit card balance gets too high. Try to always stay below 30% of your credit limit to avoid a drop in your credit score. You can calculate this by multiplying your card's credit limit by 30%. For example, if your card has a $1,000 credit limit, aim to keep the balance below $300.

LEARN MORE: How Much Available Credit Should I Have?

Ask for a credit limit increase

After nine to 12 months of using your card and making on-time payments, ask the card issuer for a credit limit increase. A higher credit limit can make it easier to keep your balances below the recommended 30% ratio.

LEARN MORE: How to Increase Your Credit Limit

Keep your account open

One factor that affects your credit score is your average account age. It's recommended to keep older accounts around to help boost your credit score. Try not to close your first credit card, in particular, since that will be your oldest credit account.

LEARN MORE: Should You Close an Unused Credit Card?

Apply for new cards sparingly

As you build your credit, you'll start to become eligible for credit cards with more benefits. There's nothing wrong with opening a new card that could save you money, but be careful not to overdo it.

Each time you apply for a credit card, it has a small impact on your credit score. Too many applications can make it difficult to continue improving your credit. Apply for a new card once every year or once every six months at most so your credit score keeps going up.

LEARN MORE: Does Applying for a Credit Card Hurt Your Credit Score?

What should I look for in a first credit card?

Beginner credit cards usually come with features or perks that are designed for new users. Here are a few features to look for when choosing the best first credit card.

No annual fee

Ideally, your first credit card is one that you'll want to keep open forever, helping you extend the age of your credit history with each passing month. We think the best first credit card is one that doesn't have an annual fee, so you won't have to pay every year just to keep it open.

LEARN MORE: Best No Annual Fee Credit Cards

Free FICO? Score tracker

Some credit cards offer free access to your FICO? Score. This allows you to keep an eye on your score from your online credit card account.

No or low security deposit

Secured credit cards are popular for those who are new to credit. To get this type of card, you pay a refundable security deposit. Because the credit card issuer is getting a deposit upfront, it can be more flexible about whom it approves.

LEARN MORE: What Is a Secured Credit Card?

Secured cards aren't your only option, so it's worth looking at unsecured cards, as well. That way, you may be able to avoid paying a deposit. If you go with a secured card, look for one with an affordable deposit amount. Cards that offer a $200 credit limit in exchange for a deposit of $200 or less are ideal.

COMPARE TOP PICKS: Best Secured Credit Cards


Rewards aren't a make-or-break feature, since the primary purpose of a beginner card is to help you build a credit score and qualify for better terms on loans and cards later. That said, if you can score rewards from your first credit card, it's certainly not a bad feature to have.

LEARN MORE: Best Rewards Credit Cards

BEGINNER'S GUIDE: Are credit cards bad? Get The Ascent's take.

Here are a few other resources that may help you with your first credit card:

Do I need a credit card?

While you don't need a credit card, there are several reasons why getting a credit card is a good idea:

  • Building credit: It's much harder to build your credit history without a credit card. A limited credit history can affect your life in many ways. The most obvious is that you'll have trouble getting approved by lenders if you ever want to borrow money. In addition, it can lead to you getting rejected when trying to rent a home, and in many states, it can even result in higher car insurance rates.
  • Security: Credit cards are the best payment method from a security perspective. If a thief makes fraudulent charges with your credit card, you can contact the card issuer to get the charges removed and receive a new card. The most you can legally be liable for with credit card fraud is $50. And most card issuers even have zero-liability policies, which means you won't be liable for fraudulent charges at all.
  • Rewards: Many of the best credit cards offer cash back, travel points, or some other form of rewards. This allows you to earn value back on the money you spend.

Credit cards vs. debit cards

Since credit cards and debit cards look alike, it's easy to get them confused. To help you tell them apart, we'll take a closer look at their similarities and differences.


Credit cards and debit cards are both physical cards that are tied to a financial account. You can use each type of card to pay for goods or services. The ways you use them for transactions are also the same. For physical transactions, the most common option is to insert your card, swipe it in a card reader, or make a contactless payment. For online transactions, you enter your card information.


Although both types of cards are tied to financial accounts, the accounts they are tied to are different. A credit card is tied to a revolving line of credit that a bank has issued you. A debit card is tied to your bank account.

This is an important distinction. With a credit card transaction, the card issuer pays, and you pay them back later. With a debit card transaction, you pay using funds from your bank account. If you have a fraudulent charge on your credit card, you can call and have that charge removed, and you won't be out any money. If you're a victim of debit card fraud, the bank may need to investigate before it can put the money back into your account.

Because of that difference, it can be easier to deal with credit card fraud. The money never leaves your bank account, like it does with debit card fraud.

Credit score

Credit cards affect your credit score, but debit cards do not. When you use your credit card and pay the bill on time, your credit will improve. Paying by debit card does not benefit your credit score in any way.

Secured credit cards

Secured credit cards are a type of credit card that require a security deposit. They're typically chosen by consumers with bad or limited credit histories who can't get approved for unsecured credit cards.

Although you need to deposit money to get a secured credit card, it's considered a credit card and not a debit card. You're still borrowing money from the credit card company. The deposit is simply collateral. That also means a secured card can help you improve your credit just like any other credit card.

If you want to start building your credit score using a secured credit card, check out our roundup of the best secured credit cards.

Important credit card terms

Credit card: A physical card that's connected to a credit account. The card can be used to make purchases through that credit account.

Unsecured credit card: A credit card that doesn't require any security deposit from the cardholder. Most credit cards are unsecured.

Secured credit card: A credit card that requires a security deposit when the cardholder opens the account.

Cash advance: Using a credit card to get cash. Cash advances typically have higher APRs and start accruing interest immediately, so they're not recommended.

Balance transfer: Transferring a balance from one credit card to another, most often because one card has a lower APR. Not all credit cards offer balance transfers.

Credit limit: The maximum balance a credit card can have. Many credit cards have different limits for cash advances. For example, a card could have a credit limit of $10,000, but a cash advance limit of $3,000. That means of the $10,000 credit limit, up to $3,000 could be used for a cash advance.

Available credit: The difference between a card's credit limit and its available credit. If you have a $400 balance on a card with a $1,000 credit limit, then its current available credit is $600.

Revolving line of credit: A line of credit that you can use and reuse, up to the credit limit, as long as the account is open. When you make payments, it frees up more available credit for you to use again.

APR: The annual percentage rate, which is the annual cost of borrowing money.

Minimum payment: The minimum amount you need to pay on your credit card by the due date. If you don't pay at least this much, the card issuer can charge you a late fee.

Statement balance: The credit card's balance on your most recent statement closing date. By paying this amount in full every billing cycle, you can avoid interest charges on purchases you make.

Credit score: A number that rates your creditworthiness, or the likeliness that you'll repay what you borrow.

Still have questions?

Here are some other questions we've answered:

Choosing a credit card

Don't you wish you could take a peek inside a credit card expert's wallet sometimes? Just to see the cards they carry? Well, you can't look in anybody's wallet, but you can check out our experts' favorite credit cards. Get started here:


  • A credit card allows you to borrow money and pay it back later. It's connected to a revolving line of credit account with a bank. You can use a credit card to make purchases with any merchant that accepts them, or to take out a cash advance.

  • APR, which stands for annual percentage rate, is the annual cost of borrowing money with a credit card. It's the interest rate you pay on charges that you don't pay off within the grace period.

  • Here's how to use a credit card to your benefit:

    • Only charge what you can afford
    • Stay well below your credit card limit
    • Always pay your card's full statement balance
    • Find a rewards program you like
    • Keep track of your card's benefits
    • Review your statement for errors and fraud
  • There are several reasons why getting a credit card is a good idea:

    • Building credit: It's much harder to build your credit history without a credit card. A limited credit history can affect your life in many ways.
    • Security: Credit cards are the best payment method from a security perspective. If a thief makes fraudulent charges with your credit card, you can contact the card issuer to get the charges removed and receive a new card.
    • Rewards: Many of the best credit cards offer cash back, travel points, or some other form of rewards. This allows you to earn value back on the money you spend.

Our Credit Cards Expert