How Credit Cards Work

Credit cards are a form of financing that lets you buy goods or services without paying cash right away. The financial institution that issues the card grants you a credit limit — the maximum you can use — and you pay the debt afterward.

The basic cycle

1. You use the card for a purchase within your limit.
2. At the end of the cycle, you receive a statement with your transactions.
3. You have a due date to settle the balance.
4. If you pay in full, you generate no interest; if you pay only part, the remaining balance accrues interest.

Types of credit cards

• Secured: require a deposit; ideal for building credit.
• Unsecured: require no deposit and often offer rewards.
• Rewards: give back points, miles, or cash on your purchases.

Use them responsibly

The key to making a card work for you is to pay the full balance every month and use less than 30% of your limit. That way you enjoy the convenience and rewards without falling into the interest trap.