February 6, 2025
When it comes to making a purchase or paying a bill, credit cards can provide both convenience and the chance to save money if you earn back some of your spending in rewards. At the same time, you can utilize credit cards to establish credit history by practicing good financial practices.
A credit card is a physical card that allows you to make purchases, pay payments, or withdraw cash, depending on the card. A credit card is best understood as a form of short-term borrowing.
When you open a credit card account, the credit card provider assigns you a credit limit. This is just the amount of money that your credit card issuer enables you to spend to make purchases or pay payments. Your available credit decreases when you charge items on the card. You then repay the credit card company with the amount you spent from your credit limit.
Credit cards can be used for online or in-store purchases, as well as bill payments. When you use a credit card for either, your card information is transmitted to the merchant's bank. The bank then receives authorization from the credit card network to complete the transaction. Your card issuer must then verify your information before approving or declining the transaction.
If the transaction is approved, payment is made to the merchant, and the transaction amount is deducted from your card's available credit. At the end of your billing cycle, your card issuer will send you a statement that includes all transactions for that month, your prior and new balances, the minimum payment needed, and the due date.
The grace period is the time between when you made a purchase with your credit card and when your statement is due. During this time, if you pay your payment in full by the due date, no interest will be charged.
However, if you carry a balance month to month, your card issuer may charge you interest. Your credit card's annual percentage rate (APR) reflects the expense of carrying a balance on an annual basis. Your APR includes both your interest rate and any additional fees, such as an annual fee if your card has one.
