“How Do Credit Cards Work?” (11 Facts: APR, Interest, Rewards & More)

Credit Cards Work 11 Facts Apr Interest Rewards
GUIDE
Linsey Knerl
By: Linsey Knerl
Updated: June 23, 2020
Advertiser Disclosure

Credit cards are an important, if not essential, part of being a consumer today. Plastic is accepted almost universally as a form of payment worldwide, and credit cards can offer some much-needed flexibility and protections against hacking, fraud, and faulty purchases. But just how do credit cards work? And what can you do to use them to your best advantage?

Let’s take a look at the basics behind one of the most popular ways to pay today, including 11 facts about APR, interest, and rewards. We’ll also explore exactly how exactly credit cards work and look at some of our top choices for credit cards available today that offer a range of perks and are suited for a variety of different credit scores.

Overview | Interest | APR | Payments | Secured | Prepaid | Balance Transfer
Cash Back | Travel & Miles | Student | Business

1. How Do Credit Cards Work?

Simply explained, credit cards are access to a personal line of credit with a set limit, but do not have a pre-determined (or installment) amount to pay back each month. You can borrow as much or as little of your available credit as you’d like (but it’s a best practice to keep your credit utilization ratio below 30%).

By using the card, you agree to the repayment terms, interest rates, and other contracts of the card. Credit cards are perhaps the most commonly used type of personal loan, and proper use of a card can help you build or even rebuild poor credit.

Those with bad credit histories should look into the benefits of having a credit card. Using a credit card responsibly can be one important way to improve your rating and continue getting better credit terms for a more satisfying credit experience. See our top card recommendations for those with bad credit below.

  • Choose which account management options are right for you.
  • Build credit with First PREMIER‡
  • Fill out an application and know in 60 seconds if you’re approved!
  • YOU’RE NOT ALONE - As the 12th largest issuer of Mastercard credit cards, First PREMIER Bank understands customer needs and is there for those who may be denied by other issuers.
  • Manageable credit limit, manageable payment, meant to fit your budget
  • ‡Build credit by keeping your balance low and paying all your bills on time every month.
  • Click here for official site, terms, and details.
★★★★★

4.8

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
4 minutes See Issuer Website Yes 9.0/10
  • Choose which account management options are right for you.
  • Build credit with First PREMIER‡
  • Fill out an application and know in 60 seconds if you’re approved!
  • YOU’RE NOT ALONE - As the 12th largest issuer of Mastercard credit cards, First PREMIER Bank understands customer needs and is there for those who may be denied by other issuers.
  • Manageable credit limit, manageable payment, meant to fit your budget
  • ‡Build credit by keeping your balance low and paying all your bills on time every month.
  • Click here for official site, terms, and details.
★★★★★

4.8

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
4 minutes See Issuer Website Yes 9.0/10
  • See if you’re Pre-Qualified with no impact to your credit score
  • All credit types welcome to apply
  • Up to $1,000 credit limit doubles up to $2,000! (Simply make your first 6 monthly minimum payments on time)
  • Free access to your Vantage 3.0 score from Experian* (When you sign up for e-statements)
  • Monthly reporting to the three major credit bureaus
  • Fast and easy application process; results in seconds
  • Use your card at locations everywhere Mastercard® is accepted
  • Mastercard Zero Fraud Liability Protection (subject to Mastercard guidelines)
  • Checking Account Required
  • Click here for official site, terms, and details.
★★★★★

4.7

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
9 minutes 24.99% - 29.99% (Variable) Yes 8.5/10

+ See more credit cards for bad credit

2. How Does Interest Work?

Interest, or the amount you pay to the lender for the privilege of borrowing money with your credit card, is a normal part of lending. All loans charge interest, and credit cards are no exception. The specific terms of interest will vary widely from card to card. Some cards will offer low or no-interest rates for a limited time (also called a “promotional period”). Others will have a standard rate anywhere between about 9% and 29%. Credit cards most often use a “variable rate” formula, which is the current “prime” rate set by the federal banking system, plus their own percentage rate.

Interest most commonly doesn’t start accruing on your purchases until after a card’s “grace” period (usually between 20 and 30 days). This means that you will not have to pay interest on your purchases if you pay off the balance of your card in full before this time limit expires. Your card’s Annual Percentage Rate (APR) only applies if you carry a balance on your card from month to month.

3. How Does APR Work?

So, what if you do have a balance at the end of the month that you can’t pay? Your card’s APR kicks in. Card terms differ, but here is the most basic example of how it works — if you owe $1,000 on your credit card, and the APR is 10%, you’ll owe $100 in interest at the end of a year on that money.

It’s important to remember, however, that you are required to make monthly payments on your card, and they are designed to bring that balance down. So, the likelihood that you’ll pay a full annual percentage rate on that same $1,000 is unlikely. Unless you continue to charge up your card with new purchases, your interest paid over time should decrease each month.

It’s also important to note that you can have more than one APR on the same card. The promotional rates we mentioned before can differ from the card’s standard APR.

4. How Do Payments Work?

Today, most payments are done online, which gives consumers ultimate control over how much and how often they pay. While most cards do not have a limit on how often you make payments, some might. To get the most from your card and keep the terms of your agreement favorable, be sure you are scheduling payments that are:

  1. Prior to the due date and in time to process before the due date
  2. More than the minimum amount required

If you’ve made several purchases that are subject to different APR’s, be sure your payment is going to the highest-APR purchases first!

If you cannot pay the balance of your card in full, at least try to pay the “statement balance.” This is the amount that was charged prior to the close of your billing period and is most likely the amount outside of the grace period and accruing interest. Check your statement carefully, as it will explain this amount, as well as how minimum payments will affect the total time needed to pay off your balance. Paying your monthly credit card bill on time is one of the most important factors in building and maintaining a healthy credit score.

5. How Do Secured Cards Work?

Secured credit cards are cards that require a prepayment of the money that cardholders can spend with the card. This money is held in a separate account and can sometimes earn a nominal amount of interest. To get a credit card with a $500 limit, for example, the cardholder must prepay $500 to the credit card company.

Secured cards are usually an option for those with poor or bad credit and a history of not making their credit card payments. There are many benefits to owning a secured card:

  • Ability to pay at locations that don’t accept cash or check
  • Protection against fraud, unauthorized transactions, or faulty merchandise/services
  • Discreet method of payment that looks like any other credit user
  • Potential for cash back bonuses and points promotions

In addition to being incredibly convenient, your use of a secured card is reported to the credit reporting agencies. A good history of secured card use can raise your credit score and make you eligible for future lines of unsecured credit. These top secured credit cards are a good place to start.

  • Earn 2% cash back on everyday purchases at Amazon, Uber, Uber Eats, Whole Foods, Netflix, Spotify, and more! And 1% cashback on everything else.
  • No credit check or U.S. credit history required. No SSN required for non-US citizens.
  • Build U.S. credit history from day 1 at major credit bureaus (get $25 when you build your credit score to a 700+ credit score within 12 months of use).
  • Get unsecured in as little as 4 months!
  • No annual fee, no foreign transaction fees, no minimum security deposit.
  • Premium benefits like Cell Phone Protection (including cracked screens) and Car Rental Insurance coverage.
  • Click here for terms and conditions.
  • Click here for official site and application.
   
★★★★★

4.8

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
10 minutes 10.24% (Variable) Yes 7.0/10
  • If approved, fund your Security Deposit to open your account.  Once open, you will have the opportunity to build your credit limit up to $5,000.
  • Opportunity to build your credit card limit over time by adding funds to your Security Deposit.
  • Reports to consumer reporting agencies help you monitor your financial progress to begin your credit building journey (build credit by keeping your balance low and paying all your bills on time every month)
  • You don't need perfect credit for a First PREMIER® Bank Secured Credit Card
  • Make your payments on time each month, and keep your balance low relative to the credit limit, for positive marks on your credit report.
  • If approved, make your first six monthly minimum payments on time and we may send you an offer to apply for an unsecured credit card. Some restrictions apply.‡
  • ‡If you apply for the second account, which is unsecured, you will be approved if you can demonstrate the ability to pay your bills, meet our minimum income requirements, do not reside in New York or Wisconsin and are not covered under the Military Lending Act.
  • FICO scores are used to represent the creditworthiness of a person and may be one indicator to the credit type you are eligible for. However, credit score alone does not guarantee or imply approval for any First PREMIER® Bank product.
  • Click here for official site, terms, and details.
★★★★★

4.8

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
4 minutes See Issuer Website Yes 9.0/10
  • Better than prepaid...Go with a secured card! Load one time - keep on using
  • Absolutely no credit check or minimum credit score required
  • Automatic reporting to all three national credit bureaus
  • 9.99% low fixed APR - Your rate won’t go up even if you are late
  • Activate today with a $200 minimum deposit - maximum $1,000.
  • Increase your credit limit up to $5,000 by adding additional deposits anytime
  • Click here for official site, terms, and details.
★★★★

4.4

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
10 minutes 9.99% Fixed Yes 7.5/10

+ See more secured credit cards

6. How Do Prepaid Cards Work?

Prepaid cards are a bit different than secured cards in that you are using your own money and your purchases are not treated as credit card purchases. You may pay transaction fees or even monthly maintenance fees, but you can reload your card at any time. You may be able to load much more onto your prepaid card than you can on a secured credit card, but your charges are much like debit card transactions in that they are usually not protected by your financial institution.

A good prepaid card can keep you from overspending, however, and many use prepaid cards as part of an overall budget system to keep their financial goals in reach. The top prepaid cards are often looked at for wise money management practices.

  • Move money from your PayPal account to fund your prepaid card account.
  • Earn cash back and personalized offers, just for using your card.
  • With Direct Deposit, you can get paid faster than a paper check.
  • Card issued by The Bancorp Bank, Member FDIC. Card may be used everywhere Debit Mastercard is accepted.
  • Click PayPal Prepaid Mastercard® for additional features & program details, and to request a Card.
  • Click here for official site, terms, and details.
★★★★★

4.5

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
5 minutes N/A (Prepaid) No 9.5/10
  • Brink’s gives you the peace of mind you deserve. Securing cash and valuables since 1859.
  • With Brink’s Direct Deposit, you can get paid faster* than a paper check.
  • No late fees or interest charges because this is not a credit card.
  • Use the Brink’s Money Prepaid Mobile App to manage your account on the go and get text message or email alerts (Message & data rates may apply.)
  • *Card issued by Republic Bank & Trust Company, Member FDIC. Card may be used everywhere Mastercard Debit cards are accepted. “Apply Now” for full details.
  • Click here for official site, terms, and details.
★★★★

4.4

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
5 minutes N/A (Prepaid) No 7.5/10
  • With Netspend Direct Deposit, you can get paid faster than a paper check.
  • No late fees or interest charges because this is not a credit card.
  • No Overdraft Fees on purchases using your card.
  • Use the NetSpend Mobile App to manage your account on the go and get text message or email alerts (Message & data rates may apply).
  • Card issued by MetaBank®, Member FDIC. Card may be used everywhere Visa Debit cards are accepted. "Apply Now" for full details.
  • Click here for official site, terms, and details.
★★★★

4.3

Overall Rating

Application Length Interest Rate Reports Monthly Reputation Score
5 minutes N/A (Prepaid) No 7.5/10

+ See more prepaid credit cards

7. How Do Balance Transfer Cards Work?

Many credit cards will offer generous balance transfer promotions, either upon first applying for the card or later on. Most users look for very low APRs for balance transfers, with many aiming to get a rate of 0% for a specific time. Once you accept and initiate a balance transfer offer, your new credit card’s lending bank will send a payment to the card you wish to have transferred, which can take up to 4 weeks to process. (You’ll want to keep making payments to your old card during this time.)

Once finished, you will pay the new rate for your credit to your new credit issuer. Most balance transfers are also subject to a “transfer fee” of up to 5% for the total transferred, although these can sometimes be as low as 1% — or even zero! These best balance transfer cards have low rates and exclusive bonuses after purchase.

8. How Do Cash Back Cards Work?

One of the most sought-after perks of a credit card is the cash back offer. It’s a simple as it sounds, giving cardholders a certain percentage of eligible purchases back to them as cash, check, or a credit statement. Balance transfers are usually not eligible for earning cash back, and some cards restrict the amount you need to cash out. Yet more cards will let you earn up to 5% back, but only in select categories. The most common rate of return on the best cash back credit cards is 1-5%.

9. How Do Travel and Miles Cards Work?

If you travel often, you may find a travel and miles reward card to be your best option. While some are airline-specific and only reward you with miles that can be redeemed for that brand’s travel services, others are more flexible and can transfer the rewards to most any loyalty travel program’s account.

An additional perk to travel and miles cards is they can give users double or even triple miles for their travel-specific purchases. Between this bonus and frequent promotional offers, it can be easy to build up miles to redeem for free stuff! Other perks may include free checked bags, seating upgrades, and companion tickets. See this list of the best airline miles credit cards for current offers available to you.

10. How Do Student Cards Work?

Designed for college students with the need to establish good credit early on, a student credit card is usually easier to be approved for than most cards because of the limited credit accompanying most student applicants.

Student credit cards oftentimes come equipped with bonuses for good grades and other perks and protections attractive to students, like cash back rewards, ride sharing credits, and cell phone insurance. These kinds of cards are great for young adults learning to build their credit and can be a valuable financial tool when used properly.

11. How Do Business Cards Work?

More and more new businesses are created each year, and that has led to a larger market of business credit cards. The perks of a business card are usually focused on the needs of today’s entrepreneur, and may include the ability to have multiple cards for employees, advanced tracking and reporting, discounts on popular business services, and higher credit limits.

In order to apply for a business card, you do need to own a business, but most companies will accept applications from companies of any size — even sole proprietors.

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