When you're new to credit cards, it's common to feel overwhelmed. And it’s good to be cautious – using credit cards without understanding their ins and outs can lead to financial mistakes. But don't worry – we'll cover all the essentials, from, “how does a credit card work” to tips on responsibly building credit.

Credit Card Basics

A credit card is linked to a credit account with a financial institution. And each time you use your credit card, you’re basically taking a short-term loan from that linked bank account, which you then have to repay. This loan lets you purchase goods or services from any merchant that accepts credit cards. Some cards even let you withdraw cash, though you may pay a cash advance fee.

The amount you have to pay back is called your balance. For example, if you make a $100 purchase, your balance will increase by $100. Every credit card also has a credit limit, which is the maximum amount you can borrow at one time. If your credit limit is $1,000, your balance can’t go over that amount.

The difference between your credit limit and your balance is known as your available credit. For instance, if you have a $1,000 limit and a $100 balance, your available credit is $900. As you make payments, your available credit increases, which allows you to borrow more. This revolving line of credit is one of the key features of a credit card.

Types of Credit Cards

Credit cards come in several different forms, all with different features. Picking the best one for you depends on your financial goals and credit history. Here are a few of the most common types:

  • Rewards cards – Rewards cards give you something back for every dollar you spend. They include options like cashback cards, travel reward cards and store credit cards.
  • Low-interest cards – Low-interest cards are good for those who need to carry a balance. They offer lower interest rates and often come with a 0-percent introductory APR.
  • Balance transfer cards – A balance transfer card lets you move debt from one card to another, usually at a lower interest rate. They can be a good option for consolidating debt and paying it off faster, but these cards usually require good or excellent credit.
  • Cards for average or bad credit – If your credit is less than perfect, your credit card options are a little more limited, but you still have choices. A secured credit card is one option for building or rebuilding credit. It requires a security deposit, which acts as collateral for the credit line. Another good option is the Juzt Digital Credit Card, which is designed especially for users who are trying to build up their credit history and requires no security deposit.
  • Student credit cards – Student credit cards are designed to help young adults establish credit while attending college. However, the Credit Card Act of 2009 places restrictions on issuing credit cards to consumers under 21 unless they have proof of income or a co-signer.

Issuers and Networks

When you use a credit card, two major players make your credit card payments work: credit card networks and issuers. Though they work together, issuers and networks are different entities. A credit card issuer is typically a financial institution, like a bank or credit union, that provides credit to consumers. A payment network – like Visa, Mastercard, Discover or American Express – actually processes your payment. They make sure the merchant gets paid and that the correct amount is billed to your account. The issuer then pays the merchant, and you are billed for the amount.

Credit Card Features and Components

Credit cards typically come with a range of important features that impact how you use and manage them. Here are a few you should make sure to understand.

  • Annual Percentage Rate (APR): Your APR determines the cost of borrowing on your card. Make sure you’re aware of your card’s purchase APR and its balance transfer APR to understand how interest will accrue on your balances.
  • Credit card balance: Managing your balance is crucial to avoid interest charges and penalties. Paying off your full balance each month can help you steer clear of racking up too much debt.
  • Fees: Credit cards often come with fees, such as annual fees, balance transfer fees, foreign transaction fees and late payment fees. Understanding these can help you minimize costs.
  • Rewards: Many cards offer cash back, points or travel miles based on your spending. These rewards can give you a return on your everyday purchases when you use them strategically.
  • Grace periods: Most cards grant you a grace period, typically 21 to 25 days, during which no interest is charged on new purchases if you pay your balance in full by the due date.
  • Sign-up bonuses: Many credit cards may offer you a bonus after you meet an initial spending threshold. This kind of bonus typically can be redeemed for cash, travel or other rewards.

Understanding Credit Limits

Your credit limit is the maximum amount of money you can borrow on a credit card. It's basically the upper limit of your spending power with that credit account. For example, if your credit card has a limit of $5,000, that's the most you can charge on that card at any given time.

But – it's important to note that your credit limit isn’t a license to spend the full amount. You should make sure you understand how much of that limit to use and how it impacts your overall financial health.

Factors Influencing Credit Limits

While the specifics vary by credit card company, several common factors help determine how much credit you’re given. Here are a few:

  • Income, debt, and expenses – Lenders look at how much income you have relative to existing debts and monthly expenses. This is represented by your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. Each lender may have a preferred DTI ratio, and this number helps them decide how much credit they believe you can responsibly handle. A lower DTI ratio suggests that you have more financial flexibility and may mean you get a higher credit limit, while a higher DTI could lead to a more conservative limit.
  • Credit utilization – Current credit utilization rate is another key factor lenders consider when setting a credit limit. This is the percentage of your available credit that you are using at any given time. A credit utilization rate below 30 percent is typically seen as favorable. For example, if your existing credit cards have a combined limit of $10,000 and you’re using $2,000 of that, your utilization rate is 20 percent, which means responsible credit usage. If a lender sees that you keep your utilization low, they may be more likely to offer you a higher credit limit.
  • Payment history – Your track record of repaying debt plays a key role in setting your credit limit. Lenders examine your payment history to gauge how likely you are to repay future debt. A strong payment history with few or no missed or late payments shows that you are capable of managing credit. On the other hand, a pattern of missed or late payments could cause a lender to set a lower limit or even deny your application.

How Credit Limits Impact Your Credit Score

Your credit limit plays a large role in your credit score, which lenders use to judge your financial responsibility and risk. One of the most important factors in your credit score calculation is the credit utilization ratio. A lower credit utilization ratio is better for your credit score. Lenders generally prefer to see your utilization under 30 percent of your total available credit. If that figure exceeds 30 percent, it can negatively affect your score because it suggests that you may be relying too heavily on credit.

Billing Cycles and Statements

Your credit card statement is a crucial document that provides a detailed summary of your account activity, upcoming changes and other essential information.

What is a Billing Cycle?

Your credit card billing cycle is the time frame between the opening and closing dates of your credit card statement. During this period, all purchases, payments, fees and interest charges are recorded on your statement. At the end of the cycle, your credit card issuer will send you a statement outlining these activities, along with your payment due date.

For example, if your billing cycle runs from the 1st to the 30th of the month, all transactions within that time will appear on your statement. The closing date marks the end of the cycle, and any purchases you make after the closing date will be included in the next billing cycle.

Understanding Your Credit Card Statement

A credit card statement offers a comprehensive overview of your account activity. It helps you track your spending, monitor for fraudulent transactions, and stay informed about changes in fees or interest rates. By regularly reviewing your statement, you can make sure you’re responsibly managing credit.

Here’s what you can expect to find in your statement:

  • Recent account activity: A summary of your transactions during the billing cycle.
  • Payment information: Details about your payment, including minimum payment due and due date.
  • Changing terms: Alerts about any changes to your card's fees, interest rates or terms.
  • Transactions: A detailed list of every transaction you made during the billing cycle.
  • Interest and fees: Information about interest charges and any fees that have been applied. 
  • Rewards: If you have a rewards card, your statement will show your earnings and redemptions.

How Minimum Payments are Calculated

Your minimum payment is the lowest amount you can pay each month to keep your account in good standing. It is based on a percentage of your balance, along with any fees or interest charges.

Credit card companies typically use one of two methods to calculate your minimum payment: a flat percentage of your balance or a percentage combined with fees and interest.

  • Flat percentage – With this method, your minimum payment is a fixed percentage of your total balance, including any interest and fees. Typically, this percentage falls between 1 and 3 percent of your outstanding balance.
  • Example – If your balance is $5,000 and your card issuer requires a minimum payment of 2 percent, you would owe $100 for that billing cycle.
  • Percentage plus interest and fees – In this approach, you pay a smaller percentage of your total balance, such as 1 percent, plus any accrued interest charges and fees for the billing period. This method often results in a slightly higher minimum payment, depending on fees and interest added to the balance. 
  • Example – Suppose your balance is $5,000, with $80 in interest charges and $8 in late fees. If your card requires a 1 percent payment plus fees and interest, your minimum payment would be $138. 

Interest Rates and APR

APR stands for Annual Percentage Rate and represents the yearly cost of borrowing on your credit card. It’s important for determining how much you'll pay if you carry a card balance. 

Different Types of Interest Rates

While there are officially three main types of interest rates – variable, fixed and promotional – it's important to note that most rates are subject to change over time, which makes them behave like variable rates.
A variable interest rate fluctuates based on financial benchmarks such as the prime interest rate or U.S. Treasury Bill rates. When you have a credit card with a variable rate, the issuer typically adds a margin, which is a percentage on top of the benchmark rate. For example, if the prime rate is 4.75 percent, a card issuer might add a margin of 10-12 percentage points for customers with good credit, resulting in an APR between 14.75 and 16.75 percent. For those with poor credit, the margin could be much higher, leading to APRs as steep as 27.75 to 30.75 percent.

A fixed interest rate remains stable over time, giving you predictable monthly payments. However, this stability comes at a price: fixed interest rates are usually higher than variable rates, meaning you pay a premium for the peace of mind that the rate won’t suddenly change. If your card issuer wants to raise the rate, they have to provide 45 days’ notice, which gives you time to either accept the new rate or stop using the card.

Even though a fixed rate offers stability, issuers can still increase the rate under certain circumstances, like if you're more than 60 days late on a payment or after a promotional period expires.

Promotional interest rates are temporary offers, usually designed to attract new customers. These promotions can take the form of 0-percent interest on purchases or balance transfers for a specific period, usually from six to 18 months. Some promotional offers might even include cash bonuses if you spend a certain amount within a set timeframe.

How APR is Calculated?

The APR is an annualized rate, but it’s applied on a daily basis using a method known as the "daily periodic rate." This means your interest accrues every day, based on your current balance, and it’s compounded over time.

For example, if your APR is 17 percent, your daily interest rate is calculated by dividing 17 percent by 365 (the number of days in a year). This daily interest is then applied to your balance, increasing the amount you owe as long as you carry a balance.

Impact of Interest Rates on Balances

It should come as no surprise that, the higher your interest rate, the higher your balance can grow. Paying off your entire credit card balance every month is the best way to avoid paying interest. If you only make the minimum monthly payment, you'll pay interest on the remaining balance, which can quickly add up.

Credit Card Fees

Many credit cards charge different types of fees, which you should also consider carefully when deciding which card is right for you.

Common Fees

  • Annual fees: Some credit cards charge an annual fee, especially those with attractive rewards or premium perks.
  • Late payment fees: If you miss a payment, you may be charged a late fee.
  • Balance transfer fees: Transferring a balance to a new card often comes with a fee, usually 3 to 5 percent of the transferred amount.
  • Foreign transaction fees: Some cards charge a fee for purchases made abroad. 
  • Overlimit fees – If you approach or go over your credit limit, you may face overlimit fees.

Credit Score and Credit History

Credit card issuers report your payment history to credit bureaus so they can calculate your credit score. Your credit score is important for determining your future borrowing capacity, including mortgages and loans. In general, the longer your credit history, the higher your credit score. A long credit history shows that you’ve responsibly used credit over time.

How Credit Card Usage Affects Your Credit Score?

Credit utilization describes the percentage of your available credit that you are currently using. For example, if you have a credit card limit of $10,000 and you’ve used $3,000 of that, your credit utilization rate is 30 percent.

This ratio is important because it accounts for 30 percent of your credit score, making it the second-largest factor after payment history. High utilization rates suggest you’re depending too much on credit, which lenders see as a risk. On the other hand, low utilization rates demonstrate responsible credit management, which can help boost your score.

Building and Maintaining Good Credit History

Using your credit card wisely can help build your credit score. Here are some tips:

  • Pay on time: Late payments can drive down your credit score. Set reminders or use autopay to ensure on-time payments.
  • Monitor your FICO® score: The FICO® score is one of the most common credit scoring methods lenders use. Some credit cards offer free access to your score so you can keep an eye on it.
  • Keep balances low: Avoid maxing out your card(s). Try to keep your balance below 30 percent of your credit limit.
  • Request a credit limit increase: After making on-time payments for 9-12 months, you can request a higher credit limit, which helps keep credit utilization low.
  • Don’t close accounts: Keeping older accounts open helps improve your credit history. 
  • Apply for new cards sparingly: Applying for too many cards can harm your credit score. Space out applications by at least six months.

Credit Card Security

Protecting consumers and businesses from fraud is more crucial than ever, and credit card issuers have several protection measures in place, like the following:

EMV Chip Technology

EMV chip technology relies on a small microchip embedded in credit and debit cards. This chip securely stores data and processes transactions, which gives consumers a more secure alternative to the older magnetic stripe technology. EMV is an acronym for Europay, Mastercard, and Visa, the three companies that pioneered the technology.

CVV Codes and Online Security Measures

Another layer of security is your card’s CVV code, a three- or four-digit number designed to prevent unauthorized use of a lost or stolen card. Sometimes referred to as a CVC (Card Verification Code), this number is usually located on the back of your card, near the signature strip, or on the front of some cards like American Express. While it's just a few digits long, the CVV helps ensure your card’s authenticity when you use your credit card online.

Unlike data stored on a card’s magnetic stripe, which can be easily duplicated, CVV codes are designed to be used only for specific transactions. Since merchants can’t legally store CVV codes, even if hackers steal your card number and expiration date in a data breach, they likely won’t have the CVV code. This makes it much harder for them to use the card for unauthorized online purchases.

Reporting Fraud and Identity Theft

Identity theft occurs when someone uses your personal or financial information without your consent – and it can happen despite the safety measures designed to prevent it. If you suspect your identity has been compromised, you should take immediate action to minimize the damage.

Here’s what you can do to report identity theft and protect your accounts:

  • Contact the Federal Trade Commission (FTC) – You can do this through their online portal at IdentityTheft.gov, or by calling 1-877-438-4338. The FTC will guide you through creating a personalized recovery plan and will generate an identity theft report, which can help you dispute fraudulent charges or accounts.
  • Alert the three major credit bureaus – Equifax®, Experian™ and TransUnion®. Request that they place fraud alerts on your credit report, which will notify potential lenders to take extra precautions before issuing new credit in your name. You can also request a credit freeze, which restricts access to your credit report, preventing new accounts from being opened.
  • Notify your bank and credit card companies – Reach out to the fraud department at your bank and any other institutions where you hold accounts, including your credit card issuers. Let them know about the theft and ask them to monitor your accounts for suspicious activity. They also can help you close compromised accounts and issue new cards.

Rewards Programs

Many credit cards offer rewards for your spending. Here are a few examples:

Types of Rewards 

Rewards cards give you something back for every dollar you spend. They usually require good credit and include the following types:

  • Cashback cards: Earn a percentage of your spending back as cash.
  • Travel rewards credit cards: Earn points or miles for flights, hotel stays, or other travel expenses.
  • Store credit cards: Offer rewards or discounts at specific retailers.

Maximizing Rewards and Benefits

If you’re using a rewards card, you want to get the most bang for your buck. Here’s how to get the most out of a rewards card:

  • Choose a card that fits your spending – Make sure the rewards card you choose aligns with your typical spending. For example, if you travel a lot, a card that rewards you with extra points or miles on travel purchases might be best. On the other hand, if groceries and gas are your main expenses, look for a card that offers rewards in those categories. If your spending is more varied, a flat-rate cash back card could give you the best value.
  • Use the right card for the right purchase – Once you have a set of rewards cards, make sure you’re smart about how you use. Check which card gives the highest return for different spending categories. For example, if you have a card offering 6 percent cash back at supermarkets, use that card for groceries rather than one that gives only 2 cash back. Some cards also offer rotating categories, with higher rewards during certain times of the year. Stay on top of these changes to make sure you’re using the best card for each purchase.
  • Take advantage of sign-up bonuses – Many credit cards offer a sign-up or welcome bonus, giving you extra rewards after you spend a certain amount within the first few months of opening your account. These bonuses can be quite lucrative, often worth hundreds of dollars. However, be sure to carefully read the terms and plan your spending carefully to meet requirements without overspending.
  • Pay your balance – While credit cards can help you quickly rack up rewards, interest charges on a revolving balance can easily wipe out any rewards you’ve earned. To truly maximize your rewards, aim to pay off your full balance every month. 
  • Read the fine print – Every credit card comes with its own set of rules and limitations, so it’s important to familiarize yourself with the fine print. For example, some cards may have spending caps in certain categories, while others may limit how much cash back or how many points you can earn.

Credit Card Trends and Innovations

Credit card technology continues to advance, making them easier and safer to use than ever before.

Contactless Payments 

Contactless payments allow you to make a purchase by simply tapping a contactless card or a payment-enabled mobile or wearable device over a compatible payment terminal. This form of payment is fast and secure, eliminating the need for swiping or inserting a card. Both cards and devices – such as smartphones and smartwatches – use the same near-field communication (NFC) technology to process transactions.

Mobile Wallets

Even if you don’t have a contactless card, you can still make contactless payments by loading eligible cards into a mobile device, like your smartphone or smartwatch. Most modern devices support contactless payments through services like Apple Pay, Google Pay and others. And innovative, digital-first card options like Juzt continue to provide convenience, security, and flexibility for consumers.

The Rise of Cryptocurrency in Credit Card Transactions

Cryptocurrencies like Bitcoin, Ethereum and stablecoins are increasingly being used for everyday purchases. In fact, major credit card companies, like Visa and Mastercard, have started working with cryptocurrency exchanges to offer crypto-linked credit cards. These cards allow users to spend their crypto holdings like traditional currency, with transactions seamlessly converted at the point of sale. Some cards also offer crypto rewards instead of traditional points or cash back, further incentivizing users to engage with digital currencies.

Choosing the Right Credit Card

You have a lot of options, and a lot of factors to consider when choosing a credit card. Below, we’ve outlined some of the key points to keep in mind.

Factors to Consider 

When choosing your first credit card, you should carefully consider the card features that best match your spending habits and lifestyle. You don’t have to look for a card with all of the benefits we’ve listed below – instead, determine which factors are most important to you.

  • No annual fee: If you choose a card with no annual fee, you won’t have to pay just to keep it open.
  • Free FICO® score tracking: Some cards offer free access to your credit score, which helps you monitor your progress.
  • Low or no security deposit: If you choose a secured card, look for one with a reasonable deposit. Some cards require a deposit equal to the credit limit, so it’s important to choose one that works with your finances.
  • Rewards: While rewards aren’t a must-have for beginners, they’re a nice bonus. Cash back or points can add value to your spending when you use your credit card responsibly.

Reading and Comparing Terms and Conditions

When choosing a credit card, understanding the terms and conditions is crucial. Credit card terms and conditions disclose key details of the credit card agreement, including interest rates, fees, rewards and penalties. These terms are important to understand because they become binding when you make your first purchase. Your terms page is usually split into two main sections:

  1. The Schumer Box: This standardized table outlines important rates and fees, such as the APR, balance transfer rates and penalties.
  1. The fine print: Below the Schumer Box, you’ll find more detailed information about payment schedules, rewards programs and card benefits.

Credit Card Myths and Misconceptions

Several myths and misconceptions surround credit cards, leading many to misunderstand how they affect their finances. Let’s break down some of the most common credit card myths and clarify the truths behind them.

  • Myth 1: Applying for a new credit card will lower your credit score – While it's true that applying for a card means a "hard inquiry" on your credit report, the impact is generally minor and temporary. Plus, opening a new card can actually help your credit score by lowering your credit utilization ratio.
  • Myth 2: You need to carry a balance to build credit – In truth, using your card responsibly – making purchases and paying them off in full each month – demonstrates positive credit behavior without the need to carry a balance.
  • Myth 3: Canceling unused credit cards improves your credit score – It might seem logical to cancel unused credit cards to improve your credit score, but this can backfire. Canceling a card reduces your available credit, which may increase your credit utilization ratio and lower your credit score. Plus, closing an account you've had for a long time can hurt your score since the length of credit history is a key factor in credit scoring.
  • Myth 4: Having multiple credit cards is bad for your credit – While applying for too many cards in a short time can lower your score, simply having multiple cards doesn’t automatically damage your credit. In fact, managing multiple credit cards responsibly demonstrates financial discipline. 
  • Myth 5: Missing a payment will automatically wreck your credit score – Missing a credit card payment doesn’t automatically mean your credit score will plummet. Card issuers usually report late payments to credit bureaus only when they’re 30 days or more past due. Missing a payment by a day or two might mean a late fee, but it won’t immediately hurt your score.

Key Takeaways

At the end of the day, credit cards can be a valuable financial tool. They help you build credit, earn rewards, and provide flexibility for large purchases or emergencies. But – understanding how credit cards work and using them responsibly is key to managing your finances. By choosing the right card, paying on time, and keeping your balances low, you can build good credit and enjoy the benefits credit cards offer.

This article provides general information only and does not constitute financial or legal advice. For guidance specific to your situation, consider consulting a financial advisor.