Credit cards 101: How do credit cards work?

What is a credit card? How do credit cards work? How do I select the right credit card for me? How can I use my credit card responsibly and not get into financial trouble? These are all questions that affect each of us, so let's dig into these a bit further.

What's a credit card?

A credit card lets you buy things or pay bills using a revolving line of credit. That means you borrow money when you need it and only pay interest on what you owe. If you pay it back, you can borrow it again. But you have to make a payment each month if you have a balance.

When you're approved for a credit card, the bank or credit card company sets a credit limit, which is the dollar amount you're allowed to use.

How credit cards work

If you don't pay the full balance every month before the bill is due, the credit card company will charge you interest on the unpaid amount.

Most credit cards have a variable annual percentage rate (APR) of interest that's tied to the prime rate.^{See note1} The APR is the cost of carrying a balance on your card over the course of a year.

Credit cards require a minimum monthly payment that might be less than your balance, but interest can add up quickly. Paying only the minimum can really cost you a lot in the long run. You'll end up paying interest on your balance and on the previous months' interest.

Why have a credit card?

Convenience

Whether you're paying for gas or groceries, lunch or a laptop, using a credit card can be the most convenient form of payment — just swipe, insert or tap.

It's also a simple way to pay bills and, in some cases, withdraw cash.

Features and perks

Credit cards may offer benefits like:

• Cash back and rewards.
• Airline miles and travel discounts.
• Purchase protection.
• Fraud protection.

Building good credit

When used responsibly, credit cards can lay the foundation for a strong financial future. There are plenty of benefits, but one of the most important is your ability to build a strong credit history.

Having good credit can make it easier to rent an apartment and lower interest rates on auto loans or mortgages. A bad credit history can make these things much more difficult.

Rebuilding credit

If you make regular, on-time payments, you can begin to repair a credit history that's been impacted by late payments, bankruptcy or other circumstances.

If you need to rebuild your credit history, secured credit cards may be a good place to start. As you shop around, look for a card with favorable terms when it comes to interest, fees or other terms and conditions.

Once you've found the card that works for you, start building good financial habits. With every monthly bill that you pay on time, you could gradually improve your credit history and your credit score.

Types of credit cards

Unsecured credit cards are the most common. They don't require a deposit and are available to most people. Here's a look at some other types of credit cards.

Secured.

You have to "secure" the card by depositing funds into an account. The amount you deposit may factor into your card's credit limit. Having a solid track record of using a secured card can help you build your credit history.

Rewards.

For people with a more established credit history, a rewards credit card can be an attractive option. These cards offer rewards that can help you earn airline miles, receive points or get cash back based on your spending. But they might come with a higher interest rate or a yearly fee.

Some purchases might earn rewards and some might not so make sure you know what's included and excluded from the rewards program.

Low interest.

Many banks entice new applicants by offering a limited-time low or even 0% interest rate credit card. These appeal to people who need to make a large purchase and can pay off the balance before the offer expires.

Student.

Before the Credit Card Act of 2009, college students received countless offers for credit cards. Now, applicants under age 21 must prove independent income, such as a part-time or full-time job.

As you research credit cards, be sure to look for any monthly, yearly or other fee. If there's a fee, be sure to weigh whether it's offset by the benefits or perks the card offers.

How many credit cards should I have?

Americans have an average of four credit cards, according to a report from Experian Consumer Credit Review.^{See note1}

Is that too many? It depends on your spending habits and needs. Before you open a new credit card, ask yourself whether you need the card for a specific reason. If not, it may just enable you to spend more than you can afford.

Also, applying for multiple credit cards will trigger "hard" credit inquiries, which are requests to check your credit for a loan, and can impact your credit score. When you check your credit report yourself, it's considered a "soft" inquiry and doesn't affect your credit.

If you're using your credit cards responsibly — that is, not carrying a balance on them — then having more than one shouldn't be a problem. That's especially true if you can take advantage of the cards' perks while staying out of debt. But, make sure to do the math to make sure the perks outweigh any credit card annual fees you might be paying.

The bottom line: Know the details.

No matter what type of credit card you choose, it's important to read the fine print so you know what you're getting into.

A credit card can be a useful part of our financial life. It's a helpful tool to make purchases, pay bills and, yes, have fun. Just be sure that it's working for you, not the other way around.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.