What Is a Credit Card?

Contribution by 1 expert

Updated: March 19, 2024

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A credit card is a plastic (sometimes metal) card you can use to pay for everyday expenses. Typically, financial institutions, like banks and credit unions, issue credit cards. Credit cards enable you to borrow money — up to a set limit — and, if the balance of the money borrowed isn't paid in full each month, that balance accrues interest.

Credit cards give consumers a convenient way to make everyday purchases and build credit, so long as they spend responsibly and pay their statement balance or the minimum required payment on time each month. However, when consumers engage in reckless spending or accrue significant interest on overdue balances, credit card use can lead to financial disaster.

Fast Facts About Credit Cards


Credit cards are a way for people (and businesses) to pay for everyday purchases quickly and without using their money immediately. However, credit card companies profit from interest charges to cardholders who cannot pay their bill in full each month. At that point, credit cards become a burden more than a resource as interest accrues at a high APR.

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The average American has $5,910 in credit card debt, according to Experian.

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Roughly 73% of families have access to at least one credit card, according to the American Bankers Association.

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Carrying a credit card balance does not help your credit score — according to Experian.

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Several types of credit cards exist, such as secured credit cards, student credit cards, rewards credit cards, co-branded credit cards and business credit cards.

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The average credit card annual percentage rate (APR) was 20.09% in the first quarter of 2023, per the Federal Reserve Board — an increase of over 5% since 2018.

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Two popular categories of rewards credit cards are points and miles (redeemable for travel and more) and cash back. Consumers with good to excellent credit scores are most likely to qualify for these types of cards.

Understanding Credit Cards

Having a credit card in your wallet as a payment mechanism serves many purposes, including the convenience of not needing to count cash for each purchase, as well as being able to earn rewards and build credit as you pay off your balance each month.

Applying for a credit card is quite simple; however, the odds of being approved weigh heavily on your credit score, income and other factors. To apply for a credit card, simply search for the best credit card for your financial needs and begin the application. Most applications should take less than five minutes. The application will likely ask for your contact info and annual income.

If you begin using a credit card for your expenses, there are a few things to remember. First, you will have billing periods similar to other bills you have, and it’s always advisable to pay your balance off in full on or before the payment due date. That is because credit cards typically have extremely high interest rates. So if you don’t pay the balance off in full, you could potentially be charged significant interest on your purchases.

If you can regularly use a credit card to build your credit history without paying any interest charges, it may be a solid financial tool for you. If you think you may struggle with paying your balance in full each month, it may be worth waiting until you have the ability to avoid monthly interest charges.

Here’s what you need to know about credit cards, from common terms to the different types of cards and frequently asked questions about the financial product.

Common Credit Card Terms

The credit card ecosystem has a wide variety of terms associated with it, so we created this list to help clarify what each term means and how it affects your credit card experience.

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    Credit Limit

    This is the maximum amount the credit card issuer is willing to extend to you. Your credit limit may change with fluctuations in income or with any credit reporting that affects your score.

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    Annual Percentage Rate (APR)

    The APR is the interest rate you’re charged on purchases that you don’t pay off from a billing cycle. Variable APR rates are tied to the Prime Rate and often vary depending on the applicant's creditworthiness, aka FICO Score.

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    Minimum Payment

    The minimum payment is the least amount of money you are required to pay on your monthly credit card balance. It’s often based on a flat percentage of your balance.

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    Credit Score

    Your credit score is a numbered score assigned to you by a credit bureau, representing your credit rating. The higher the score, the better. Financial institutions use this score when considering whether to grant you a credit card or a loan.

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    Rewards Program

    Many credit cards offer rewards programs, which typically earn consumers points, miles or cash back based on how much they spend.

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    Balance Transfer

    A balance transfer moves a credit card balance from one card to another. This is often done to consolidate credit card debt and, hopefully, reduce the amount of interest you pay.

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    Grace Period

    A grace period is the time between the end of a billing cycle and the due date of a credit card monthly payment. The Credit CARD Act of 2009 requires grace periods to be at least 21 days.

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    Late Payment Fee

    The late payment fee is the fee charged for not paying at least the minimum credit card payment by the due date. Currently, the maximum allowed late fee is up to $41.

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    Annual Fee

    An annual fee is an amount charged by the credit card company for having the card, separate from the interest rate on purchases. This amount varies by issuer and can sometimes be waived the first year, and there are many credit cards with no annual fee.

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    Credit Utilization Ratio

    Credit utilization is a credit scoring calculation. It assesses how much of a total credit limit is being used to form a credit utilization ratio.

History of Credit Cards

Before the modern age of sleek credit cards in our wallets, there was a long revolution of consumer payments that started over 100 years ago.

Here’s a brief history of credit cards, including where we started and how we got to where we are now.

1914: Western Union’s “Metal Cards”

Western Union issues metal charge plates to its preferred customers, allowing them to charge purchases and pay the balance at a later date. The plates were commonly referred to as “Metal Money".

1950: Diners Club

Diners Club introduces the first multipurpose charge card made of cardboard. It was initially accepted only by a small number of restaurants and hotels. It has been part of Discover since 2008.

1967 to 1977: Notable Increase in Credit Card Usage

Credit card usage increased dramatically between 1967 and 1977, when consumer use of all varieties of credit cards increased at an average annual rate of 12.2%.

1968: Truth in Lending Act (TILA) Is Enacted

In 1968, the TILA was passed and sought to protect consumers against deceptive and unfair lending practices.

1970: The Fair Credit Reporting Act (FCRA)

The FCRA regulates how consumers’ credit reports can be used and accessed and gives consumers the ability to review their reports, dispute information if necessary and be told if any information within it caused a denial for credit, employment or insurance.

Early 1970s: Magnetic Stripe Adopted

The magnetic stripe on the back of credit cards was rolled out worldwide in the early 1970s, allowing for electronic data storage and improved transaction processing.

2006: Payment Card Industry Security Standards Council (PCI SSC) Is Established

The PCI SSC was established by American Express, Discover, Mastercard, Visa and JCB International to develop and manage security standards for the payment card industry.

2009: Credit Card Accountability Responsibility and Disclosure Act (CARD Act) Is Enacted

The CARD Act provides significant protections for consumers, including restrictions on some interest rate hikes and fees, amending the TILA.

2015: Widespread Adoption of EMVs

EMV chip technology is widely adopted in the United States, providing increased security against fraud.

Choosing the right credit card

Types of Credit Cards

There are many credit card types to choose from, each with its own benefits for a specific kind of consumer. Before applying for a credit card, whether it is your first or an additional card in your wallet, consider your spending habits and the purpose of getting the card.

Credit Card Type

Rewards Credit Cards

A rewards credit card offers incentives to cardholders for making purchases. These incentives can include cash back, points or airline miles, which are redeemable for various rewards, such as travel, gift cards, merchandise or statement credits, providing added value for cardholders' spending.

Travel Credit Cards

A travel credit card is specifically designed to provide benefits and rewards for travel-related expenses. It often offers perks such as airline miles, hotel points, travel insurance, airport lounge access and discounts on travel-related purchases, making it a valuable tool for frequent travelers.

Airline Credit Cards

An airline credit card is affiliated with a specific airline. It offers rewards such as frequent flyer miles or airline-specific points for purchases made with the card. These rewards can be redeemed for free for discounted flights, upgrades or other travel-related benefits within that airline's network.

Co-Branded Credit Cards

A co-branded credit card is a credit card that is issued in partnership between a credit card company and a specific brand or organization. It carries the branding of both the credit card company and the partnering brand, offering specialized rewards, benefits or discounts that are tailored to the brand's products, services or customer base.

Secured Credit Cards

A secured credit card requires a security deposit to be made by the cardholder. The deposit acts as collateral, providing a guarantee to the credit card issuer in case the cardholder defaults on payments. Secured cards are typically used to build or rebuild credit history.

Cash Back Credit Cards

A cash back credit card offers a percentage of the purchase amount as cash rewards. When the cardholder makes eligible purchases, they receive a certain percentage of the transaction value back as cash, typically in the form of a statement credit or a direct deposit.

Student Credit Cards

A student credit card is designed specifically for students who are new to credit. It usually comes with a lower credit limit and favorable terms, such as no annual fee and rewards tailored to student spending. It helps students build credit history and learn responsible credit card use.

0% APR Cards

A 0% APR credit card offers an introductory period during which no interest is charged on purchases and, often, balance transfers. This promotional period lasts for a specified time, such as 12 or 18 months, allowing cardholders to make interest-free payments, making it an attractive option for borrowing or debt consolidation.

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Each type of credit card has potential value for different types of consumers. So if you’re interested in applying for a credit card, find which card is the best fit for you today.

Benefits and Drawbacks of Credit Cards

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  • Helps Build Credit: Credit cards help build credit by reporting your payment history to credit bureaus. Consistently making on-time payments and keeping a low credit utilization ratio demonstrates responsible credit use. A longer credit history and a mix of credit accounts can also positively impact your credit score. Building good credit with credit cards can lead to better loan terms, lower interest rates and increased borrowing power in the future.
  • Earning Valuable Rewards: The value of credit card rewards can vary depending on the specific rewards program and how you use them. Cash back rewards provide direct monetary value, while travel rewards can offer significant savings on flights, hotels and other travel expenses. By maximizing rewards through strategic spending and redemption, credit card rewards can add up to substantial savings and benefits over time.
  • Valuable Consumer Protections: Credit cards offer several consumer protections. Firstly, they often provide fraud liability protection, meaning you're generally not responsible for unauthorized charges. Secondly, they may offer purchase protection, reimbursing you for damaged or stolen items purchased with the card. Additionally, credit cards typically have dispute resolution mechanisms, allowing you to challenge billing errors. Lastly, some credit cards offer an extended warranty or price protection, providing additional safeguards for your purchases.
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  • May Come With High Interest Rates: Credit card interest rates can be considered bad due to often being much higher compared to other forms of borrowing. The high interest charge can lead to significant debt if a balance is not paid in full each month. Over time, the accumulated interest can make it difficult to pay off the principal balance, resulting in a cycle of debt and financial strain. And cash advances from your credit card can carry an even higher interest rate and potential fees.
  • May Encourage Overspending: Credit cards can encourage overspending due to their convenience and ease of use. The ability to make purchases without immediate cash payment can create a disconnect between spending and the actual cost. Credit card companies also incentivize spending through rewards programs, enticing users to make more purchases to earn rewards, potentially leading to impulse buying and increased debt.
  • Becomes One More Financial Obligation: Credit cards can cause stress in several ways. The accumulation of credit card debt and high interest rates can lead to financial strain and anxiety. Balancing multiple credit card payments and due dates can be overwhelming and difficult to manage. Additionally, unexpected fees, billing errors or fraudulent charges can create additional stress and the need for time-consuming dispute resolution. Finally, the pressure to maintain a good credit score and the fear of missing payments or incurring fees can also contribute to credit card-related stress.

Credit Cards FAQ

Is it better to use credit or debit?
What happens if I don't use my credit card?
When should you cancel a credit card?
What happens if you pay your credit card balance before bill generation?
What is the difference between debit and credit?

Expert Insights

  1. Can I negotiate credit card interest rates or fees?
  2. At what point or circumstance are rewards credit cards worth it?
  3. How should consumers use credit cards in their lives for maximum gain and potential?
Lee Huffman
Lee HuffmanCredit Card and Personal Finance Expert

Related Resources

Credit cards can be a somewhat difficult financial product to navigate. There is no one right strategy for everyone, and it depends largely on your financial habits and goals.

For related content, check out these MoneyGeek articles:

  • How Credit Cards Work: A guide on how using a credit card works, including spending, paying the balance and key terms you need to know.
  • APR vs. APY: A full description of the difference between annual percentage rate and annual percentage yield.
  • Credit Cards vs. Debit Cards: It can be tricky to know the difference between the two and which one is the best solution for your spending habits and financial needs.
  • A Guide To Your First Credit Card: Picking your first card can be overwhelming. Here’s a guide on how to do so.

About Brett Holzhauer, CPFC

Brett Holzhauer, CPFC headshot

Brett Holzhauer is a Certified Personal Finance Counselor (CPFC) and a personal finance reporter at MoneyGeek. He has written for several leading publications, including Forbes Advisor, LendingTree, CNBC and ValuePenguin.

Holzhauer has a journalism and mass communications degree from the Walter Cronkite School of Journalism and Mass Communications at Arizona State University.

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