A credit card is much more than a plastic rectangle; it's a form of payment that can be used as a short-term loan. Used wisely, a credit card can help your finances by improving your credit score. Misused, a credit card can spell doom for your finances and your credit score.
The Ultimate Guide to Using Credit Cards For First-Time Users
Beginner's Guide to Credit Cards: How Credit Works
Updated: March 21, 2024
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Updated: March 21, 2024
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An Absolute Beginner's Guide to Credit Card Basics
A credit card is a form of payment that can be used as a short-term loan — or simply for convenience. When you make a purchase and pay with a credit card, you're simply deferring payment until you receive a bill for that purchase online or through the mail.
If you pay your credit card bill in its entirety by its due date, you can avoid interest charges and pay only the original cost of your purchase. If you choose, however, you can pay a minimum payment on your credit card and carry a balance from month-to-month. During this time, credit card interest will accrue on the balance you carry.
The following outline illustrates the different steps you'll go through as you apply for a credit card, get approved and begin using it as a form of payment.
1
Application
When you decide it's time to apply for a credit card, you'll fill out a credit application. Credit card applications ask for an array of personal and financial details, including your Social Security number, household income and home address. Our guide on the different types of credit cards available can help you decide which type of credit card is best for your situation, whether it's a balance transfer card, low-interest card, cash back credit card or another credit product.
2
Approval
Since a credit card extends a line of credit that works like a loan, banks use your financial details to assess your creditworthiness. Most banks look for applicants who have a stable income, low debt obligations and an acceptable credit history. Our guide on getting your first credit card can help you determine whether your credit and income are sufficient to apply for your first card.
3
Purchases
Once your line of credit has been approved, you'll receive your card in the mail along with a credit limit. This limit represents the sum total of the money you can spend on your card. Use your card to make as many purchases as you want, but only up to your prescribed credit limit. Once you reach your limit, you'll need to pay down your balance if you want to put additional purchases on your card.
4
Statements
Once per month, your credit card issuer will send you a credit card statement that includes a summary of your purchases. Along with your statement, you'll receive an outline of your monthly minimum payment obligation. At this point, you should check your statement for accuracy and take note of your credit card bill's due date. In addition, you should take note of your credit card's annual percentage rate, or APR. If you choose not to pay your balance in full, this percentage represents how much interest accrues on your purchases each day.
5
Payments
Once you receive your statement and conceptualize your monthly payment, you can decide how to pay your balance down. The minimum payment included in your bill represents the lowest amount of money you can pay without incurring a penalty. However, you can pay any amount larger than the minimum if you want to minimize the interest you're charged and pay off your credit card balance faster. If you need help with your credit score, it may help to research the type of scores and ways to improve credit scores. Either way, your credit activities will be reported to the three largest national credit reporting agencies — Experian, Equifax and TransUnion.
BEST CARDS FOR NO OR POOR CREDIT
For students or people with no credit history or a poor credit score, getting approved for a credit card can be challenging. If you find yourself struggling to get a credit card, no need to worry as these cards for no credit or poor credit are designed to help you build your credit.
The links above will take you to one of our partner's sites, where you can compare and apply for a selected credit card.
How to Read Your Credit Card Statement
The following graphic was created to mimic a typical credit card statement. Keep in mind, however, that not all credit card statements look exactly alike. While all of the information included on the statement example below will be included on any statement you receive, it might be listed in a different spot or introduced with slightly different terms.
1
Account number
This unique number helps your card issuer recognize your account.
2
Previous balance
This figure represents the balance on your card during last month’s billing period.
3
Payments
This figure represents credits made to your account during last month’s statement period.
4
Other credits
Other credits to your account generally include returns made on your card.
5
Purchases
The total of purchases you made during this month’s billing statement period.
6
Balance transfers
A balance transfer occurs when you transfer a credit card balance from an old card to a new one — any balances transferred during this billing period will be listed here.
7
Cash advances
Cash advances are cash loans you take against your credit card and your credit account. Generally speaking, cash advances are charged higher interest rates and come with additional fees.
8
Past due amount
Any amount past due will be notated here.
9
Fees charged
Any fees the card issuer charged you.
10
Interest charged
This number is the amount of interest you’re paying to carry a balance this month and is determined by your annual percentage rate (APR).
11
New balance
This is the balance on your credit card as of your statement closing date — you can choose to pay this balance in full, make the minimum payment, or pay any amount in between.
12
Credit limit
Your credit limit represents the total sum of money you can spend on new purchases with your account.
13
Available credit
Your available credit is the amount of your credit limit left to spend after subtracting your current balance.
14
Statement closing date
All activity on your credit card starts on the date after your last statement date and ends on this date.
15
Days in billing cycle
We tend to think of months. But banks think in 30-day cycles.
16
Call customer service
Some credit card issuers have dedicated teams to answer calls from customers using a certain card. Your customer service team’s number may be unpublished.
17
Lost or stolen card
Call your card issuer as soon as you discover your card is missing or stolen.
18
Minimum payment due
This is the minimum amount of money you need to pay towards your credit balance this month.
19
Payment due date
Your card issuer must receive your payment by this date if you want to avoid penalties and late fees.
20
Late payment warning
Note the fee and increased interest rate you may pay if you make a late payment.
21
Minimum payment warning
The federal government recently started to require credit card issuers to make clear disclosures of the penalties consumers pay for making late payments.
BILLING STATEMENT GOTCHAS
By law, you have a minimum of 21 days to make your minimum payment. Your bank or credit union may give you more time, such as 28 days, which is what our hypothetical bank does in the above example. Regarding payment date, subtract a day or two from your bank's deadline. Some banks will consider payments made on the date due as late.
Payment Timeline: When to Pay Your Bill
When you use your credit card to make a purchase or multiple purchases, it's crucial to keep a close eye on timing when it comes to your payment. Your credit card statement does the bulk of the heavy lifting for you by listing your minimum required payment and due date, but that doesn't mean the situation is entirely cut and dry. Here's an example of how your payment timeline might look once you start using credit:
1
Start of cycle
Day 0: May 20, 2021
You have a $1,255.26 existing
credit card balance.
2
Purchase
Day 1: May 21, 2021
You spend $529.27 on purchases
with your credit card.
3
No new purchases
Days 2 through 29
Your account balance remains constant with no interest accrued on your new purchases. Your balance from last month, however, continues to accrue interest.
4
Billing statement closes
Day 30: June 19, 2021
Your billing statement closes. You now owe a balance of approximately $1,800.
Day 58
You review the bill and submit payment
within your bank's 28-day deadline.
Day 65
Mail your payment in approximately one week from receiving it to leave plenty of time for your bank to receive it and process it.
Card Statement Review Checklist
Verify that all charges on your statement are yours, and correct. Once you receive your statement in the mail, you'll want to look each charge over carefully to verify that it was yours and that the number is correct.
1
Check to see if your bank or credit union credited your payments
Once you have made at least one payment on your credit card, you'll want to check subsequent credit card statements to make sure your payment was credited to your account in full.
2
Watch for surprise bank fees
Surprise bank fees can include late fees, over-the-limit fees and cash advance fees. If you are charged any of these fees as a mistake, you'll want to report it to your card issuer immediately.
3
Glance at your interest rate
Your annual percentage rate, or APR, is the percentage of interest you're charged if you carry a balance. Glance at your statement to make sure this rate is correct and hasn't changed for any reason.
4
Double check your due date — and plan for it
If you pay your credit card bill late, you may need to pay a late fee and might experience a negative impact to your credit score. To avoid a late payment, take note of your due date and plan to pay early.
CREDIT CARDS VS. CHARGE CARDS
A "credit card" and a "charge card" are not one and the same. A charge card requires you to pay off your balance in full every month, whereas a credit card allows you to carry a balance for as long you make the minimum (or more) monthly payments.
What Happens the Instant You Swipe or Dip Your Credit Card
Using your credit card to make a purchase might seem convenient and seamless, but the reality is a fury of activity goes on behind the scenes. The following steps illustrate exactly what happens each time you whip out your card and say, "Charge it."
1
You get ready to pay and present your card.
A customer presents their credit card to a merchant in order to purchase products or services.
2
Your card is used to "pay" for merchandise or a service.
A customer either swipes their card on the point-of-sale card reader, or "dips" their card into the terminal if both parties use EMV chip technology.
3
Once the credit card is swiped or dipped, the card reader will contact the merchant's payment processor.
The processor will do one of two things — either contact the cardholder's bank and ask for approval directly or contact the bank's processor and ask for an authorization. While this may sound complex, all of these steps can take up just a few seconds combined.
4
Your transaction is approved or denied.
Once your card issuer receives the transaction and begins analyzing it, they will issue an immediate approval or deny your transaction. Most denials are due to a maxed out credit limit or suspicion of fraud.
MORE: DOES REQUESTING A CREDIT INCREASE HURT YOUR CREDIT SCORE
5
If your purchase is approved by your card issuer, you'll receive a receipt for your purchase and complete the transaction.
If you spend more than $50, you'll generally need to sign for your purchase as well. At this point, a cashier or customer service agent may ask to see your identification to verify your identity.
6
A fee is deducted from the transaction, and paid by the merchant.
Most of the time, these fees vary from 1-6%. Once a purchase is made, this fee is deducted from the total transaction and paid by the merchant. On a $200 purchase, a merchant may be asked to pay a fee between $2 and $12.
7
The card issuer splits the fee with the payment processor.
The payment processor splits the fee with your card issuer so that both parties receive a cut of your transaction and turn a profit.
8
The consumer gets a cut in the form of rewards.
If you're using a rewards card that accrues cash back or rewards points, your bank will apply part of their fee towards your rewards balance.
Credit Card Security: A Growing Problem
According to the Federal Trade Commission, the government agency received more than 4.7 million reports in 2020 through its Consumer Sentinel Network. Nearly 1.4 million of those were related to identity theft — a number that has close to doubled since 2019.
The most common form of reported identity theft was government documents and benefits fraud (406,375 reports), followed by credit card fraud (393,207 reports). Other types of identity theft and fraud perpetrated against the American people include employment-related fraud and loan fraud.
Although private and small-scale fraud takes place on a large scale every day, some of the most notorious identity theft grabs and operations have taken place during large-scale data breaches during the last few years.
If you have been watching the news at all, you have probably seen how popular brands like Volkswagen and Wegmans have experienced data spills that have resulted in consumer data being put at risk. In addition, a report released in 2021 by the Thales Group found that nearly half of US companies surveyed reported experiencing a breach in the last 12 months, slightly higher than the global average.
Surely not all of those breaches dealt with consumer data or leaked credit card numbers. Still, it serves to underscore that the probability that your personal information will be compromised is high. And while much of the fall-out from data breaches is out of your control, one of the easiest ways to catch identity theft or fraud is to monitor your credit card activity and other accounts for any fraudulent use.
PROTECTING YOURSELF FROM FRAUD
The Federal Deposit Insurance Corporation (FDIC) offers an array of tips that can help you protect yourself from fraud, regardless of the security of the merchants you use. These include:
- Keep your personal information private: Don't share your personal financial details with anyone who requests them online or over the phone.
- Verify requests for your personal details: Don't trust anyone who asks for your private financial details without confirming why they need them, and the legitimacy of their request.
- Shred old receipts and statements: Don't leave printed financial information out where others can find it and read it.
- Choose PINs and passwords that aren't obvious: Use a complex combination of letters, numbers and special characters in each password you use.
- Inform your bank when you don't receive a statement: Likewise, contact your bank if you notice any fraudulent transactions on your account.
- Check your credit report at least once per year: AnnualCreditReport.com allows you to check your credit report with all three credit reporting agencies for free every year.
RELATED TOPICS YOU MAY BE INTERESTED IN:
High-Security Credit Cards: How EMV Chip Cards Work
EMV technology, which stands for Europay, MasterCard and Visa, is the new global standard for credit card technology and fraud prevention. As of October 1, 2015, most merchants and card issuers in the United States were required to transition towards this technology — or face the prospect of more liability in the event fraud takes place.
Unlike traditional credit cards you swipe on the terminal, EMV-equipped cards add an extra layer of complexity — and protection — to each transaction. Once you "dip" your card into the terminal, your card's new microchip helps create a dynamic authentication process, which is much harder to crack and cannot be "skimmed" as the old swipe cards often were.
Since transactions made with EMV-equipped cards are encrypted from end to end, fraud perpetrated by crooked cashiers and scammers who place "skimming devices" should slowly cease to exist as this new technology takes hold. Purchases made online, on the other hand, won't receive this extra layer of protection since EMV technology is only useful for point-of-sale transactions.
Although EMV technology is a fairly new idea in the United States, it was first used in France as far back as 1992. The rest of Europe soon followed, and now it's a technology used worldwide. The hope is that, over time, the added security these cards offer will lead to fewer instances of fraud and lower costs for consumers, merchants and banks.
Hidden Lives of Credit Cards
1
Location of the EMV chip
U.S. credit and debit cards are now getting higher-security EMV chips. Merchants must replace their old point-of-sale devices to read cards with EMV chips.
2
Expiration date
Typically three years after the issuing date. Cards expire on the last day of the month indicated on the card. Required by online merchants.
3
Name of authorized user
Person allowed to use the card. Account payment history is included in the authorized users' credit history. Required by online merchants.
4
Magnetic strip
Contains a digitized version of the account number, expiration date and name.
5
Authorized user’s signature
Merchants are allowed to compare the signature on the back of the card to the receipt you sign to verify you are the authorized user. A merchant may refuse to accept your card if you have not signed it.
6
Security code
Visa, MasterCard, Discover and American Express call the security code slightly different things, but the purpose is the same — it's designed to reduce fraud in card-not-present transactions. American Express places its code on the front of its cards. Required by online merchants.
How Banks Make Money Issuing Credit Cards
Although credit cards can serve as a valuable tool for your finances, they don't offer their services out of the kindness of their hearts. The truth is, they make small amounts of money as you use your card, then collect fees and credit card interest on the bank end. Here are some of the common ways banks profit from your use of credit:
- Fees
Fees can include transaction fees charged to the merchant (generally 1-6% of each purchase), annual fees, over-limit fees and late fees. While some fees (e.g. late fees, over-limit fees) can be avoided if you follow your card issuer's rules, other fees, like annual fees, may be required if you want to keep your card. - Interest
When you carry a balance on your credit card each month, your balance gets charged credit card interest. The amount of interest you're charged is largely dependent on your cards annual percentage rate, or APR, which can run anywhere from 0-29%. - Selling your name
Some card issuers make money by selling your name, address, and financial details to companies who may try to sell you a product or service. You will generally receive communication from these outside companies through traditional mail service, and sometimes, over the telephone.
Expert Insight
Learning the ins and outs of credit cards can be daunting for first-time cardholders. MoneyGeek asked for expert input on some of the most commonly asked credit card questions.
- What are a few credit card myths people shouldn't believe? What should they do instead?
- Is it a good idea to pay your credit card balance more than once a month? Why or why not?
- What will happen if you miss paying your credit card for one month?
- What are some tips to help pay off credit cards every month?
- What items or purchases should you not put on a credit card? How should people pay for those purchases?
Robert BergmanProfessor of Marketing at Lewis University
Prasenjit Ghosh, Ph.D.Assistant Professor at the University of Southern Indiana
Rebecca BrooksFinancial Coach and Owner of R&D Financial Coaching
Markia BrownCredit Literacy Coach & Content Creator at The Money Plug
Dr. Robert ChattVisiting Assistant Professor of Finance at Georgia State University
Richard M. ProctorAssociate Professor of Finance at University of Siena
Sona Klucarova, Ph.D.Assistant Professor, Department of Marketing & Entrepreneurship, University of Nebraska at Omaha
Julie R. Hollinshead, CFAAdjunct Faculty, Department of Finance, Mike Ilitch School of Business, Wayne State University; President of Hollinshead Advisory Services
Di QingAssistant Professor and Director of Financial Planning at Carolina University
Yuliya Strizhakova, Ph.D.Associate Professor of Marketing at the Rutgers University–Camden School of Business
Colin SlabachAssistant Professor of Retirement & Assistant Director at The American College of Financial Service
Brandan E. Wheeler, Ph.DAssistant Professorat at Alabama A&M University
John Lerew, CFP®, CLTC®Certified Financial Planner
Tammy Pompei, CFP®Associate Financial Planner at Braun-Bostich & Associates
Richard EliasCFP®, AWMA® at Rodgers & Associates
Brittany Davis, AFC®Associate Financial Planner at Brunch & Budget
Sallie Mullins ThompsonCPA/PFS, CFP and CDFA
Lynn S. Evans, CFP®Founder and Managing Director of Women of Substance, LLC
Erika Safran, CFP®Founder of Safran Wealth Advisors, LLC
Sergio GarciaFinancial Planner, CFP, at BFS Advisory Group
Dan Kresh, CFP®Financial Advisor at Creative Wealth Management, LLC
John M. Mason, CFP®President and Senior Financial Planner at Mason & Associates, LLC
Michael Frontera CFP®, RICP®, ChFC®Founder of Retirement Theory
Peter Vilim, CFP®, CDFA®, CIMA®Associate Advisor at Francis Financial
Jacqueline SchadeckCFP® at Apex Financial Services, Inc.
Carrie Cook, CFP®, CRPC®Founder & CCO of What About Us Financial, LLC
Ekenna Anya Gafu, CFP®, AAMS®Chief Financial Officer and Director of Planning at Bay Street Capital Holdings
Larry DuffanyPrincipal Owner, Larry the Money Medic
Ryan Osborne, CFP®Financial Analyst at Moisand Fitzgerald Tamayo, LLC
Ervin Starr, Ph.D.Professor of Management and Strategy at Roberts Wesleyan College
John Loyd, CFP , MBA, EAFounder of The Wealth Planner™
Brent WeissChief Evangelist, CFP, and Co-Founder of Facet Wealth
Kerry JacksonCFP®, CRPS®, CSLP, Partner and Director of Financial Planning at Fish and Associates
Ashley BurrellCFP®, Investment Operations Manager at Meld Financial, Inc.
Cristina Briboneria, CFP®, AWMA®, ADPA®Managing Director, Private CFO® at oXYGen Financial
Carrie L. JohnsonAssociate Professor and Extension Specialist at North Dakota State University
James McDougalFinancial Planner at Brighton Jones
William Bevins, CFP® CFTAInvestment Advisory Representative of Cypress Capital
William Nunn, CFP®Managing Member, Founder of Horizon Financial Planning LLC
Mark Lange, AIF, AWMA, CRPC, CRPS, RICPFounder of Prudent Financial LLC
Juan Munoz, CFP®, AIF®, CRC®, AAMS®Financial Planner and Founder, Life Strategy Financial
Jeff GaleFiduciary Financial Advisor, CFP®, CRPC®, with Willamette Financial Advisors, LLC
Robyn M. YoungCertified Daily Money Manager®, Owner of Money Care, LLC
Acie MiddletonFinancial Coach CMC® CFEI at Rebel Financial
Daniel RoccatoClinical Professor of Finance at the University of San Diego School of Business
Delia FernandezFounder and President at Fernandez Financial Advisory, LLC
Thomas KopelmanCo-Founder and Financial Partner at AllStreet Wealth
Dr. Katie LandgrafDBA, MBA, CPA, Assistant Professor in Accounting at University of Hawai`i-West O`ahu
Nina LloydPresident & CEO of Opus Financial Advisors, CFP & CRPC
John P. CorronCFP®, Wealth Advisor at Abaris Financial Group, LLC
Monica PadineantDirector, Client Services at Laird Norton Wealth Management
Jill CarrFinancial Advisor, CFP, CPA at Stephens Wealth Management Group
Becky Walen, AFC, CFP, MSFPSVP, Market Development Director at Bell Bank Wealth Management
Carla Adams, CFP®Financial Advisor at Diversified Portfolios, Inc.
Stacey FrankVice President, Financial Advisor at A&I Financial Services LLC
Johnson Rhett, CFP®, ChFC®Financial Advisor at Branning Wealth Management, LLC
Ryan MarshallPartner, CFP®, AIF® at ELA Financial Group
Knight ColmanCFP® Professional at Colman Knight Advisory Group
Sarah CarlsonFounder, Private Wealth Advisor; CFP, CLU, ChFC
Justin Green, CFP®Founder & Financial Planner at Assist Financial Planning
Asad GouraniCEO at AG Wealth Management
Haley Tolitsky, CFP®Financial Planner at Cooke Capital
Steven ShagrinJD, Certified Money Coach/Master Money Coach & Trainer, Certified Professional Retirement Coach, Chartered Retirement Planning Counselor, Registered Life Planner, Former CFP®
Dr. Andrew BurnstineAssociate Professor of Marketing at Lynn University
Michael B. KeelerCertified Financial Planner and Chief Executive Officer of Peak Financial Solutions
Jennifer WallisSenior Marketing Vice President at Retirement Investment Advisors, Inc.
Bri PeckFinancial Planner, CFP® at Stepp & Rothwell, Inc.
Resources
- Cybersecurity Awareness Basics: The FDIC offers an array of tips aimed at helping you protect your credit and your identity
- Get My Free Credit Report: The Federal Trade Commission tells you how and where to get your free credit report.
- Consumer Financial Protection Bureau - Credit Cards: This page from the Consumer Financial Protection Bureau offers tips on how to select a credit card, how to file a credit card complaint, and laws that could affect your use of credit.
- Know Before You Owe: Credit Cards: The Consumer Financial Protection Bureau offers resources that can help you use credit responsibly.
- What's that Chip Doing On My Credit Card?: This Consumer Financial Protection Bureau resource explains EMV technology and how it works in a real world sense.
About MoneyGeek Team
The MoneyGeek editorial team has decades of combined experience in writing and publishing information about how people should manage money and credit. Our editors have worked with numerous publications including The Washington Post, The Daily Business Review, HealthDay and Time, Inc., and have won numerous journalism awards. Our talented team of contributing writers includes mortgage experts, veteran financial reporters and award-winning journalists. Learn more about the MoneyGeek team.
sources
- Federal Trade Commission. "New Data Shows FTC Received 2.2 Million Fraud Reports from Consumers in 2020." Accessed June 28, 2021.
- Federal Trade Commission. "Consumer Sentinel Network: Data Book 2020." Accessed June 28, 2021.
- CNN. "Volkswagen hack: 3 million customers have had their information stolen." Accessed June 28, 2021.
- Security Magazine. "Wegmans discloses data breach." Accessed June 28, 2021.
- PYMNTS.com. "Understanding The Role EMV Plays In A Digital Future." Accessed June 28, 2021.
- Thales Group. "2021 Data Threat Report." Accessed June 28, 2021.
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Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, credit card issuer, hotel, airline, or other entity. Learn more about our editorial policies and expert editorial team.
Advertiser Disclosure: MoneyGeek has partnered with CardRatings.com and CreditCards.com for our coverage of credit card products. MoneyGeek, CardRatings and CreditCards.com may receive a commission from card issuers. To ensure thorough comparisons and reviews, MoneyGeek features products from both paid partners and unaffiliated card issuers that are not paid partners.