Credit Card Basics
Everything you need to know about credit cards, how they work, and how to use them responsibly
A credit card is a payment card that lets you borrow money from a bank to make purchases. Unlike a debit card that takes money directly from your bank account, a credit card gives you a short-term loan that you pay back later.
Credit Card
- Borrow money, pay back later
- Build credit history
- Earn rewards (points, cash back)
- Better fraud protection
Debit Card
- Uses your own money immediately
- No credit history built
- Limited or no rewards
- Less fraud protection
Think of it this way: A credit card is like a temporary loan. You buy something today, and the bank gives you until next month to pay them back - often with no extra cost if you pay on time!
Understanding the key concepts and terms
Credit Limit
This is the maximum amount you can borrow. If your limit is $5,000, you can spend up to $5,000 before needing to pay some back.
Example: You have a $5,000 limit and spend $1,000. You now have $4,000 available to spend. When you pay back the $1,000, your available credit goes back to $5,000.
Billing Cycle & Statement
Your credit card charges are grouped into monthly periods (usually 30 days). At the end of each period, you get a statement showing what you owe.
Interest Rate (APR)
APR = Annual Percentage Rate - the yearly cost of borrowing if you don't pay in fullIf you don't pay your full balance, the bank charges you interest (extra money). Most credit cards charge 15-25% APR.
The Golden Rule: Always Pay in Full
To avoid interest charges, pay your full statement balance before the due date. This is the #1 rule of using credit cards successfully!
Grace Period
The time between your purchase and when you need to pay it back (21-25 days after statement closes). During this time, you pay no interest if you pay in full.
This is free money! You can use the bank's money for 25-55 days (depending on when you make a purchase) completely free if you pay on time.
Follow these rules to build credit and avoid debt
Always Pay in Full
Pay your entire statement balance before the due date to avoid interest charges. This is the most important rule!
Pay On Time
Set up autopay or calendar reminders. Late payments hurt your credit score and incur fees ($25-40).
Keep Utilization Low
Try to use less than 30% of your credit limit (ideally under 10%). If your limit is $5,000, keep your balance under $1,500.
Only Spend What You Can Afford
Treat your credit card like a debit card - only buy things you already have money for in your bank account.
Monitor Your Statements
Check your statements regularly for unauthorized charges. Credit cards offer better fraud protection than debit cards.
Common Mistakes to Avoid
- • Carrying a balance "to build credit" - This is a myth! You don't need to pay interest to build credit.
- • Missing payments - Even one late payment can drop your credit score by 100+ points.
- • Maxing out your cards - High utilization hurts your credit score.
- • Applying for too many cards at once - This can temporarily lower your score.
Your credit score determines what cards you can get and what rates you pay
Your credit score is a number (300-850) that tells lenders how responsible you are with credit. A higher score means better cards and lower interest rates.
What Affects Your Credit Score?
Building good credit takes time! Pay on time, keep utilization low, and be patient. Most people can reach 740+ within 1-2 years of responsible use.
Credit cards let you borrow money short-term and build credit history
Always pay your full balance before the due date to avoid interest charges
Keep credit utilization under 30% (ideally under 10%) for best credit score
Your credit score (300-850) determines what cards you qualify for
Never carry a balance just to "build credit" - that's a costly myth
Ready to Learn About Rewards?
Now that you understand the basics, learn how to earn valuable rewards with your credit cards