What Is a Credit Card and Should You Get One?

A credit card is a payment tool issued by a bank or other financial institution that provides access to a revolving line of credit.

You can use a credit card to purchase goods or services in person, over the phone, by mail or online, at any merchant that accepts credit card payments. At the end of each billing cycle, you must pay back what you borrowed or be charged interest on the balance.

There are various types of credit cards to choose from, with different credit limits, interest rates, eligibility requirements and perks. Learn more about what a credit card is and whether it’s the right choice for you before you apply.

How do credit cards work?

When you swipe or insert a credit card, you’re essentially borrowing money from a financial institution to buy products and services. If you don’t pay the money back by the end of the billing cycle — typically one month — you’re charged interest on the credit card balance.

Credit card bills

Every billing cycle, you’ll receive a credit card statement that shows what you spent, how much you need to pay back and by when. Check your statements regularly to ensure the charges are correct, and to catch any potential fraudulent activity early.

In general, credit cards have a minimum payment due every billing cycle. This is a portion of the total balance, and must be paid to avoid damaging your credit score or paying an even higher interest rate.

While paying just the minimum amount avoids certain credit card fees and penalties, it’s best to pay off the full balance if you can, to avoid being charged interest, especially as credit card interest rates can be high (usually around 19.99%).

ATMs

Using your credit card to withdraw money from an ATM is known as a cash advance. However, cash advance interest rates are usually higher than your standard rate and start accumulating the moment you withdraw the money. For these reasons, cash advances are not generally recommended unless it’s an emergency.

Credit limits

A card’s credit limit is the amount of money you’re allowed to borrow at one time. For example, if your card has a credit limit of $3,000 and you spend $2,000, you have $1,000 available to spend. If you pay back the $2,000, you’ll have the full $3,000 available again.

Credit card limits vary among card companies and may be based on your credit score or credit history, or the security deposit provided, such as with secured credit cards.

Specific rules about cash advances, interest rates, late fees, billing statements and other important credit card policies can be found in the issuer’s terms and conditions. You should get a copy of these rules with your physical card, and be able to view them on the issuer’s website.

Credit cards vs. other payment cards

Here’s a quick summary of charge cards, debit cards and prepaid cards, and how they differ from credit cards.

Charge Card

A charge card has no pre-set credit limit. Instead, the amount you can spend is adjustable, based on a variety of factors like your credit history and account activity. There is no minimum payment option with a charge card — the balance must be paid off in full every month or you could face very high interest rates, such as 30%

Debit Card

A debit card swipes like a credit card but is tied to your bank account, so when you use the card to purchase items, you’re using your own money. If you spend more than what you have in your bank account, it may result in overdraft fees.

Prepaid Card

Unlike credit or debit cards, prepaid cards are not linked to a bank or financial institution; You can often pick one up at the local supermarket. To use a prepaid card, you need to load it with your own money, not borrowed money. Once you’ve used all the money on the card, you have to reload it to keep using it.

Pros and cons of credit cards

Pros:

Cons:

Should you get a credit card?

You may want to consider getting a credit card if you want to:

How to get a credit card

When you’re ready to get a credit card, the first step is to fill out an application. The easiest way to do this is online, and the process typically takes a few minutes.

Credit card issuers review your credit score, which is recorded as a hard inquiry on your credit report. So long as you meet the requirements and the lender doesn’t see you as a credit risk, you should be approved.

Once approved, you’ll typically receive the new card in the mail. When it arrives, you’ll need to activate it, set up a PIN number and sign-up for an online account if you want to see your statements and make payments online.