What is a Credit Card and How Does it Work?

October 17, 2022

A credit card is a payment card issued to users to enable the cardholder to pay a merchant for goods and services based on the cardholder’s accrued debt.


How do Credit Cards Work?

Once approved for a credit card, the financial institution sets a credit limit for goods and services. Credit limits will be determined by debts, available credit on other cards and income. Visa, Mastercard, American Express and Discover process card transactions and are responsible for getting the payment to the merchant and billing the correct card holder.

Payment options include paying a minimum, paying the balance in full, or paying an amount in between. Paying the minimum each month will cost you more in interest while paying the balance in full allows you to avoid any applied interest from your purchases. Payment networks send reports to the credit bureaus- Equifax, Experian and TransUnion to formulate your credit score (determines your eligibility for borrowing money). Payment history accounts for 35% of your credit score. At least a minimum payment must be made by the due date each month to avoid late fees and reduction of your credit score.


Credit Cards vs. Debit Cards

A debit card is linked to your checking account and pulls money from your account when a purchase is made. Positive attributes of debit cards include avoiding interest by using your own money to pay for purchases and will not affect your credit score. Credit cards offer higher reward programs and provide stronger fraud protection. Credit cards can impact your credit score both positively and negatively.


Student Credit Cards

Credit cards are available to college students who are under 21 years of age, with proof of income or a co-signer (someone willing to risk their credit to help another build theirs). If a student credit card is a not a possibility, a secured credit card is a way to establish credit by paying a cash deposit upfront to guarantee your credit line.


Good practices for efficient credit card use:

  • Pay your bill on time and in full every month
  • Balances should remain below 30% of available credit
  • Wait at least six months between credit card applications
  • Monitor your account weekly to calculate spending and avoid fraud
  • Keep no-annual-fee cards open and active to maintain a favorable credit score


Dangers of Credit Card Use


 Credit card debt

Never borrow more than you can afford to pay back and avoid interest by paying your monthly balance in full. There are credit apps and tools to help you track your spending habits

Missing your credit card payments

Missing payments can have a serious impact on your credit score. Late fees and a penalty APR may be applied to your balance. Autopay is one way to avoid missing a payment but depositing enough money in your account for payment withdrawal will be your responsibility Text or email reminders are helpful to make sure a missed payment does not occur.

Heavy Interest Charges

Causes of heavy interest charges can stem from carrying over a monthly balance. If your balance is high, you may want to consider a balance transfer card which allows you to be interest free for a given amount of time. If the balance exceeds this time allowance, you will be charged back interest for the duration of the specified period.

Using Too Much of your Credit Limit

A high credit card utilization ratio can negatively affect your credit. Try to keep your credit utilization under 30% of your maximum line of credit. Paying off debt it will also help reduce your credit utilization ratio.


How to obtain a free credit report:

AnnualCreditReport.com – (877) 322 – 8228


Credit Reporting Bureaus:


Order a credit report: 1-800-685-1111


Order a credit report: 1-888-397-3742


Order a credit report: 1-800-888-4213