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.

This guide will show you:

  • How to get a credit card
  • How to read your credit card statement
  • A glimpse of what happens during and after a credit card transaction, and
  • How today’s technologies are changing credit cards

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.

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, airline credit card, cash back credit card, low interest card, or another credit product.

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.

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.

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.

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. Either way, your credit activities will be reported to the three largest national credit reporting agencies — Experian, Equifax, and TransUnion. See the MoneyGeek.com page Credit Score Basics to learn more.

How to Read Your Credit Card Statement

The following graphic was created to mimic a typical credit card statement. By hovering over each section with your mouse, you can read details on each component and what it means.

XXX Bank Credit Card Account Statement

Account Number XXXX XXXX XXXX XXXX

This unique number helps your card issuer recognize your account.

February 21, 2012 to March 22, 2012

Summary of Account Activity

Previous Balance

This figure represents the balance on your card during last month’s billing period

$535.07

Payments

This figure represents credits made to your account during last month’s statement period, and can represent payments or returns

-$450.00

This figure represents the payment you made on your card during last month’s billing period

Other Credits

Other credits to your account generally include returns made on your card

-$13.45

Purchases

The total of purchases you made during this month’s billing statement period

+$529.57

This figure represents the purchases you made this month

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

+$785.00

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

+$318.00

Past Due Amount

Any amount past due will be notated here

+$0.00

Fees Charged

Any fees the card issuer charged you

+569.45

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, or APR

+510.89

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

$1,784.53

Credit limit

Your credit limit represents the total sum of money you can spend on new purchases with your account

$2,000.00

Available credit

Your available credit is the amount of your credit limit left to spend after subtracting your current balance

$215.47

Statement closing date

All activity on your credit card starts on the date after your last statement date and ends on this date

3/22/2012

Days in billing cycle

We tend to think of months. But banks think in 30-day cycles

30

QUESTIONS?

This section details the customer service numbers you can call if you need assistance, lose your card, or notice a fraudulent transaction on your statement

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

1-XXX-XXX-XXXX

Lost or Stolen Card

Call your card issuer as soon as you discover your card is missing or stolen.

1-XXX-XXX-XXXX

Payment Information

New Balance

$1,784.53

Minimum Payment Due

This is the minimum amount of money you need to pay towards your credit balance this month

$53.00

Payment Due Date

Your card issuer must receive your payment by this date if you want to avoid penalties and late fees

4/20/12

Late Payment Warning

Note the fee and increased interest rate you may pay if you make a late payment

If we do not receive your minimum payment by the date listed above, you may have to pay a late fee of up to $35 and your APRs may be increased up to the Penalty APR of 28.99%.

Minimum Payment Warning

The federal goverment recently started to require credit card issuers to make clear disclosures of the penalties consumer pay for making late payments

If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

If you make no additional charges using this card and each month you pay…

You will pay off the balance shown on this statement in about…

And you will end up paying an estimated total of…

Only the minimum payment

10 years

$3,284

$62

3 years

$2,232 (savings = $1,052)

If you would like information about credit counseling services, call 1-800-XXX-XXXX.

Important Changes to Your Account Terms

The following is a summary of changes that are being made to your account terms. You have the right to opt out of these changes. For more detailed information, please refer to the booklet enclosed with this statement.

These changes will impact your account as follows:

  • Transactions made on or after 4/9/12:

    As of 5/10/12, any changes to APRs described below will apply to these transactions.

  • Transactions made before 4/9/12:

    Current APRs will continue to apply to these transactions.

  • If you are already being charged a higher Penalty APR for purchases:

    In this case, any changes to APRs described below will not go into effect at this time. These changes will go into effect when the Penalty APR no longer applies to your account.

Revised Terms, as of 5/10/12

APR for Purchases

16.99%

Transactions

Reference Number

Trans Date

Post Date

Description of Transaction or Credit

Amount

5884186PS0388W6YM

2/22

2/23

Store #1

$2.05

0544400060ZLV72VL

2/24

2/25

Store #2

$12.11

55541860705RDYDOX

2/24

2/25

Store #3

$4.63

554328608008W90M0

2/24

2/25

Store #4

$114.95

054830709LYMRPT4L

2/24

2/25

Store #5

$7.35

854338203FS8000Z5

2/25

2/25

Pymt Thank You

$450.00-

Please detach this portion and return with your payment to insure proper credit. Retain upper portion for your records:

Please indicate address change and additional cardholder requests on the reverse side.

Account Number

xxxX xxxx XXxx xxXX

New Balance

$1,784.53

Minimum Payment Due

$53.00

Payment Due Date

4/20/12

AMOUNT ENCLOSED:

$_____

  • XXX Bank
  • P.O. Box XXXX
  • Anytown, Anystate XXXXX

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.

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:

Billing Timeline
  • Start of Cycle
    Day 0: February 20, 2016

    You have a $1,255.26 existing
    credit card balance.

  • Purchase
    Day 1: February 21, 2016

    You spend $529.27 on purchases
    with your credit card.

  • 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.

  • Billing Statement Closes
    Day 30: March 22, 2016

    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.

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.

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.

  • 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.

  • 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.

  • 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.

  • 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.

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.

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 to 6 percent. 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.

Tip

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.

Credit Card Security: A Growing Problem

According to the National Criminal Justice Reference Service, a U.S. Department of Justice resource, identity theft continues to plague the American public, banks, and merchants. As the most recent government statistics show, over 2 million consumer complaints were received by the Federal Trade Commission’s agencies in 2013, 14 percent of which were related to identity theft.

The most common form of reported identity theft was government documents and benefits fraud (34 percent), followed by phone and utilities fraud (14 percent), and bank fraud (8 percent). 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 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 retailers like Target, Home Depot, and Anthem Insurance have experienced data spills that have resulted in consumer data being put at risk. A report released in 2014 by the Ponemon Institute even implied that as many as 43 percent of businesses experienced some type of data breach in 2013.

In each of these cases, retailers responded quickly to tighten their data and protect consumer information from reaching the air waves. Most retailers who have been on the receiving end of fraud abuse, including Target Stores, have implemented new security measures intended to minimize fraud and prevent data breaches in the future. These measures include a push towards EMV chip technology, which is intended to improve security by adding another layer of security to each point-of-sale credit transaction.

FDIC.gov 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.

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. There are now more than 1 billion chip-enabled credit cards in use around the globe, and the U.S. is one of the last industrialized nations to embrace this new technology. 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

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.
Location of
EMV chip
Person allowed to use the card. Account payment history is included in the authorized users’ credit history. Required by online merchants.
Name of
authorized user
Typically three years after the issuing date. Cards expire on the last day of the month indicated on the card. Required by online merchants.
Expiration date
Merchants are allowed to compare the signature on the back of the card to the receipt you sign to verify you are the authorized use. A merchant may refuse to accept your card if you have not signed it.
Authorized
user’s signature
Contains a digitized version of account number, expiration date, and a name.
Magnetic
strip
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.
Security
code

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 percent 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 to 29 percent.

  • 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.

Reader Resources

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Credit Card Resource Page

USA.gov 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.

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Cybersecurity Awareness Basics

The FDIC offers an array of tips aimed at helping you protect your credit and your identity.

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Get My Free Credit Report

The Federal Trade Commission tells you how and where to get your free credit report.

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Know Before You Owe: Credit Cards

The Consumer Financial Protection Bureau offers resources that can help you use credit responsibly.

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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.

Updated: July 28, 2017