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How does a credit card work?

Short answer

A credit card lets you borrow up to a set credit limit to pay for things. Each month you get a statement with a minimum payment and a due date. Pay the full balance by the due date and most cards charge no interest on purchases. Pay less and the rest accrues interest at the card's APR.

Checked against 5 official sources
AT

By · Founder of ITIN Club

Updated

One billing cycle, start to finish

  1. 1

    You use the card

    Each purchase adds to your balance and lowers your available credit. The issuer sets your credit limit after you apply, based on your credit report, history and the income you reported.

  2. 2

    The statement closes

    The bill must reach you at least 21 days before the payment is due. It shows your balance, your minimum payment and the due date, which stays the same every month.

  3. 3

    You pay in full, or you don't

    Pay the whole statement balance by the due date and the grace period means no interest on purchases. Pay less and interest is charged on what's left. You also lose the grace period, so new purchases start charging interest the day you make them.

  4. 4

    If you miss the minimum

    You can be charged a late fee and a higher penalty APR, lose an intro rate, and hurt your credit. Capital One, for example, typically reports an account late after it's more than 30 days past due.

The terms on your statement

TermWhat it means
APRThe yearly interest rate. Cards often have different APRs for purchases, cash advances and balance transfers. Interest may compound daily
Minimum paymentThe least you must pay to stay in good standing. The statement must show how long paying only the minimum would take, and what to pay each month to clear it in 36 months
Grace periodTime between the end of the cycle and the due date. Issuers don't have to offer one, but most do on purchases
Cash advanceCash taken with the card. Interest usually starts on the day you take it, with no grace period

No SSN? Major issuers take an ITIN on the application. The guide below shows which ones.

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Related questions

Sources

  1. What is a grace period for a credit card? — CFPBconsumerfinance.gov
  2. Know Before You Owe: credit cards — CFPBconsumerfinance.gov
  3. What is a credit card interest rate? What does APR mean? — CFPBconsumerfinance.gov
  4. Why did I get a low credit limit on a credit card? — CFPBconsumerfinance.gov
  5. Capital One: making credit card paymentscapitalone.com

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