How Does Credit Card Work?

A credit card is a card you can use to buy things, pay bills, or get cash, like a short-term loan. When you start a credit card account, the credit card company sets a limit on how much you can spend. This is the maximum amount of money that the credit card company allows you to use for buying things or paying bills. As you make purchases with the card, your available credit decreases. Later, you need to repay the credit card company for the amount you spent from your credit limit. So, How Does Credit Card Work?

How Does Credit Card Work

Credit cards are convenient for online and in-store purchases as well as bill payments. When you use a credit card for any of these transactions, your card information is sent to the merchant’s bank. The bank then seeks authorization from the credit card network to proceed with the transaction. Finally, your card issuer verifies your details and decides whether to approve or decline the transaction.

Once the transaction is authorized, the merchant receives the payment and the available credit on your card decreases by the transaction amount. When your billing cycle ends, your card issuer will send you a statement with all the month’s transactions, your previous and new balances, the minimum payment required, and the due date.

The grace period is the time between when you make a purchase on your card and the due date on your statement. If you pay your bill in full by the due date, no interest charges will be added.

If you keep a balance from month to month, your card issuer can charge you interest. The annual percentage rate (APR) of your credit card shows the cost of carrying a balance for a year. It includes your interest rate and other expenses, like an annual fee if applicable.

Credit cards usually have an APR that can change based on the prime rate. The CARD Act of 2009 limits when credit card companies can increase your rate.

Types of Credit Cards

Different types of credit cards exist, with the largest group being rewards cards. These cards offer rewards like travel points for purchases. Some cards give extra rewards for spending in specific categories. Many reward cards are partnered with airlines or hotels.

Cash-back cards are like rewards cards, but instead of earning points or miles, you receive a percentage of cash back on your purchases. This cash back can be a fixed rate, such as 2% or 5%. On the other hand, secured credit cards are specifically designed for individuals who want to establish or improve their credit history. If you have a limited credit profile, you may qualify for a secured card. However, keep in mind that a security deposit is required for this type of card, which serves as collateral for the card issuer.

Student-centered credit cards also assist individuals with limited credit history in establishing credit. These cards are specifically designed for college students and may not provide significant rewards.


Responsible use of credit cards can help build credit. By paying bills on time, keeping balances low, and only opening necessary credit cards, you can establish and maintain good credit. Remember, paying your bill in full every month is the most effective way to avoid interest charges and improve your credit score.