A card is a small, rectangular piece of plastic or metal that lets you make purchases. Whether you’re buying lunch or a new piece of furniture, a credit card enables you to borrow funds from a credit issuer to pay the merchant. Then, every month, you’ll receive a statement in the mail with your balance, which you’ll want to pay off every billing cycle. Otherwise, you’ll owe interest on the remaining amount.
While the concept sounds simple, it’s easy to rack up debt if you’re not careful. With that in mind, here’s credit cards explained in-depth.
Credit Card Meaning
Banks and other financial institutions issue credit cards to consumers to extend revolving lines of credit. A revolving line of credit means the cardholder can borrow money up to their credit limit and then repay it on a continuing basis.
With other lines of credit, like a personal loan, you take out a lump sum amount and agree to repay it within a specific timeframe. During this timeframe, you make fixed installment payments. Whereas with a credit card, you can repeatedly borrow against the limit, which gives you more flexibility to use the card as needed.
When you receive your credit card, you’ll note several different numbers on it. There’s the credit card account number, alongside your name and the credit card issuer’s logo. Also on a credit card are the credit card expiration date, which marks when the card is valid through, and the CVV number on a credit card, which offers an extra layer of security in purchases made online or over the phone.
Recommended: What Is a Credit Card CVV Number?
How Does a Credit Card Work?
Once you have a new credit card in hand, you can use it to make purchases at places that accept credit card payments. Then, every month, you’ll receive a statement either electronically or in the mail, depending on your preference. The statement will include all purchases, your outstanding balance, and the minimum monthly payment due.
You’re required to make at least the minimum payment on your account to keep it open and in good standing. However, you also can opt to pay your entire balance in full or decide on another amount (as long as it meets the minimum payment requirement). If you were to pay an amount that exceeds your total balance, then you’d end up with a negative balance on your credit card.
If you aren’t able to make the minimum credit card payment, the outstanding balance will roll over to the next month and begin accruing interest and fees — which can significantly add up over time. Therefore, it’s best to get in the habit of paying off your credit card every month to avoid paying an exorbitant amount of interest. But, if your finances don’t allow you to pay the entire balance, you could make smaller payments throughout the month to minimize the amount of accumulating interest.
To ensure you make your monthly payments, you can usually set up auto-pay for the minimum payment. This way, you won’t miss a payment and get charged a late fee. Unfortunately, late payments also can end up on your credit report, which can negatively affect your credit score.
How Does Credit Card Interest Work?
Every credit card comes with an annual percentage rate (APR), which represents the annualized cost of borrowing including interest and fees and marks an important part of how credit cards work.
Some credit cards have more than one APR, such as a balance transfer APR, an introductory APR, or a cash advance APR. While introductory APRs are usually lower than the standard rate but only last for a promotional period, cash advance APRs are typically higher than the standard purchase APR.
You will pay interest based on the APR on a credit card if you have an outstanding balance that carries over from one month to the next. Credit issuers use your average daily balance, interest rate, and the number of days in the billing cycle to calculate the interest amount.
Usually, credit issuers offer a grace period where interest will not accrue. This period is typically between the statement date and due date, commonly 21 days.
In some cases, you may also owe other credit card fees. For example, if you make a late payment or return payment, you could be charged a late fee. Or, if your credit card charges an annual fee, the credit issuer will add it to your statement. Also, some credit cards charge foreign transaction fees when you use your card in different countries.
Types of Credit Cards
Now that you understand how credit cards work, here are some available credit card options.
You can earn cashback, points, or even miles when you spend money using a rewards credit card. Some credit cards may also offer a sign-up bonus. For example, a credit card could offer 100,000 points when you spend $4,000 or more within the first three months of enrolling.
You can usually find a card offering rewards that coincides with your spending habits. For example, if you love shopping at a particular store, retail-branded cards have lucrative benefits for frequent shoppers.
Keep in mind that you typically have to have a good credit score to qualify for a rewards credit card. But, even if you do qualify, it’s essential to keep your spending habits in check. Reward cards incentivize you to spend money, so you don’t want to end up overspending and getting into a pile of debt you can’t climb out of. As long as you monitor your spending habits, a rewards credit card is worth considering.
Credit Builder Cards
If you have little to no credit or need to build your credit back up, a credit builder credit card is a viable solution. You’ll likely start with a lower credit card limit and an APR that’s higher than the average credit card interest rate to reduce the credit card issuer’s risk.
Credit builder credit cards usually don’t come with the bells and whistles that rewards cards offer. Instead, the card can help you build your credit. With that said, you’ll want to make on-time monthly payments and pay off your balance every month. Not doing so could negatively impact your credit history and cost you a lot of money.
Balance Transfer Cards
Do you have a high-interest outstanding credit card balance? Using a balance transfer credit card is one solution for helping you tackle your debt. Balance transfer credit cards let you move your current credit card debt to a new account with a lower interest rate. Additionally, transferring your balance means you’ll only have to stay on top of one payment a month, rather than multiple.
Having a good credit score can help you qualify for a balance transfer credit card. If you qualify, you could receive a lower ongoing rate or even a 0% introductory rate, which usually will last for six to 18 months. You’ll want to try to pay off your balance within that promotional period, before the higher APR kicks in.
Note that balance credit cards often charge a fee for transferring a balance — usually 3% to 5% of the amount transferred. So, make sure you factor in the additional fees before you move over your existing balance.
Secured Credit Cards
Another option for those with little to no credit or poor credit history is a secured credit card. With a secured credit card, you make a refundable deposit, which protects the card issuer from defaulted payments. If you default, the card issuer can use the deposit to recoup the loss.
Your deposit is usually the amount of your credit limit. For example, if you are approved for a $500 limit, you may need to put down $500. Though your deposit will be tied up while the account is open, a secured credit card can allow you to build your credit when used responsibly. Just keep in mind that while secured credit cards are generally easier to qualify for, they also tend to have higher APRs and fees.
If you decide to close a secured credit card account, you can usually get your deposit back. The card issuer may also give you the option to upgrade to an unsecured card if you’ve proven your creditworthiness. In this case, you’d receive a refund as well.
Travel Credit Cards
If you’re a frequent flier or visit hotels often, a travel credit card can be a lucrative choice. Many airline and hotel brands have credit cards that let you earn miles, points, or rewards to use toward your travel adventures. Some credit cards may also come with a sign-up bonus or extra perks such as free checked bags, access to VIP lounges, and travel insurance.
When selecting a card, you’ll want to find the card that makes sense for the way you travel. That way, you can get the most out of your credit card. Travel credit cards usually require applicants to have good to excellent credit for approval. So, before applying, make sure to check your credit score to see if it’s acceptable.
0% Introductory APR Credit Cards
If you’re getting ready to make a big purchase, a 0% introductory APR credit card might be worth considering. With this type of credit card, the card issuer gives you a 0% introductory rate to make purchases during a specific time frame. This way, you can make the purchase without paying interest on the expensive item(s).
However, you’ll want to make sure you repay the entire amount before the introductory period ends to avoid interest. Before you swipe, make sure you have a plan to pay off the balance within that time frame.
To qualify for a 0% introductory APR credit card, you usually must have good to excellent credit.
Reasons to Use a Credit Card
Credit cards offer a convenient way for consumers to borrow money. Other reasons a credit card can be worthwhile include to:
• Build credit. Credit cards give you the means to establish a strong payment history, which can help boost your credit score. When you need to apply for a personal loan or mortgage in the future, a higher credit score can help you qualify for better terms and rates.
• Track spending. Credit cards are valuable tools for budgeting since many cards let you track your spending on an app or online. Also, some credit cards give you the ability to categorize your expenses to see where your money is going and make adjustments accordingly.
• Get fraud protection. If your debit card information is stolen, fraudsters can directly access your bank account. But, if you use a credit card, you usually have more fraud protection benefits in places such as purchase protection and identity theft protection. For instance, you can dispute a credit card charge and even receive a credit card chargeback.
• Earn rewards. Many credit cards offer a reward program that gives you points or cashback when spending money. For example, you could earn money for traveling, shopping, or even statement credits.
Remember, while credit cards are a valuable financial tool, they can also hinder you if not used responsibly. Just as you can boost your score with a credit card, you can also damage it — and rack up a mountain of debt in the process that may be hard to get rid of (for instance, here’s what happens to credit card debt when you die).
How to Apply for a Credit Card
Before you apply for a new credit card, you’ll want to check your credit score. You can pull a free copy of your credit report at AnnualCreditReport.com. Knowing your credit score will help you determine whether you meet the approval requirements for the cards you’re interested in.
Once you decide on some card options, you can usually get prequalified online. If you prequalify for a card, your approval odds could be in your favor (though you’re still not actually approved). Also, when companies process your preapproval, they only complete a soft credit inquiry, which won’t impact your credit like a hard inquiry does. However, when you’re ready to apply, the credit issuer will conduct a hard credit inquiry.
If you’re approved for the card you apply for, you should receive your credit card in the mail within 14 days.
Apply for a SoFi Credit Card Online and Earn 2% Cash Back1
Understanding what a credit card is and how it works is crucial to ensuring you use your credit card responsibly. A credit card can serve as a great financial tool, especially given how many types of credit cards are out there. While you will need to be aware of interest and fees, a credit card can also help you to build your credit history, earn rewards, and track your spending.
Want a credit card that helps you reach your financial goals? No matter if you’re trying to save, invest, or pay off debt, the SoFi Credit Card offers up to 2% cash back. Plus, it has no foreign transaction fees and reduces your APR by 1% once a member makes 12 monthly on-time payments, of at least the minimum payment due, for as long as they continue to make such payments.
What are the main differences between credit and debit cards?
Debit cards use the money in your checking account to pay for purchases. When you make a purchase using a credit card, on the other hand, you’re using a line of credit to borrow money. Therefore, you usually have to pay interest on your transactions with a credit card if you don’t repay your balance right away.
How do I choose a credit card?
It’s helpful to select a credit card that matches your needs and financial habits. You’ll also want to make sure you meet the card issuer’s approval criteria. For example, if a credit card requires a credit score of 700 and your score is 650, you may have to explore other options or take steps to improve your credit before applying.
How long does it take to get a credit card?
Once you submit a credit card application, it may take just minutes before you’re approved. Usually, you’ll receive your credit card within 14 days of approval. You can call credit issuer and request expedited processing if you need your credit card sooner.
SoFi cardholders earn 2% unlimited cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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