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A credit card is a payment card that lets its holder borrow money from a bank or other issuer to make purchases, pay bills, or get cash advances up to an established credit limit. The borrowed money must be repaid. If a balance is not paid in full by the due date, it usually carries into the next billing cycle and accrue interest.
How does revolving credit work on a credit card?
Revolving credit allows a credit card holder to borrow repeatedly, as long as the account stays within its credit limit. Each purchase reduces the available credit, while payments restore it. For example, a card with a $5,000 limit and a $1,000 balance has $4,000 available to use. Interest is generally charged on balances carried into the next billing cycle.
How does a credit card differ from a debit card?
A credit card lets you borrow money from the card issuer and repay it later, possibly with interest. A debit card instead takes money directly from a linked bank account, usually a checking account. Both types of cards can be used for purchases in stores or online, but only credit cards generally involve borrowing.
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A tap is all it takes to make a purchase with a contactless credit card.
A credit card is a payment card that allows its holder to borrow money from a bank or other issuer to make purchases, pay bills, or get cash advances, up to an established credit limit. Cardholders receive periodic statements and can generally avoid interest on purchases by paying the statement balance in full by the due date. Unpaid balances typically accrue interest when carried into the next billing cycle, while certain transactions, such as cash advances, may incur interest charges immediately.
How credit cards work
Credit cards are a form of revolving credit, meaning cardholders can borrow repeatedly up to a specified credit limit. Each purchase reduces the amount of available credit, and payments replenish it. For example, a card with a $5,000 credit limit and a $1,000 balance has $4,000 in available credit.
When a cardholder makes a purchase, the transaction information is sent through a payment network to the card issuer, which determines whether to approve it. Once the transaction is approved and processed, the merchant receives payment, and the purchase amount is added to the cardholderâs balance.
Credit cards vs. debit cards
Credit cards and debit cards may look alike and can both be used to make purchases in stores or online. The difference is where the money comes from.
A credit card lets you borrow money from the card issuer, up to a specified limit, and repay it later, potentially with interest. A debit card draws money directly from a linked bank account, typically a checking account, rather than extending credit.
Credit card issuers generally operate on monthly billing cycles. At the end of each cycle, the cardholder receives a statement listing transactions, the outstanding balance, the minimum payment required, and the payment due date. Most cards offer a grace period between the end of the billing cycle and the payment due date. Cardholders who pay their statement balance in full by the due date can generally avoid interest on purchases, provided they qualify for the grace period.
Cardholders who donât pay the full statement balance can carry the remaining amount into the next billing cycle, subject to interest charges. Interest rates are expressed as an annual percentage rate (APR), although interest is typically calculated daily. Different rates may apply to purchases, balance transfers, and cash advances. Unlike purchases, cash advances generally begin accruing interest immediately.
Cardholders must make at least the minimum payment by the due date to keep their accounts in good standing. Paying only the minimum, however, extends the time needed to repay the debt and increases the total interest paid.
Credit card issuers also generally report account activity to credit bureaus. Payment history and credit utilizationâthe percentage of available credit being usedâcan affect credit scores, which lenders consider when evaluating applications for loans and other forms of credit.
Types of credit cards
Credit cards come in several varieties, with different features, benefits, and eligibility requirements. Some are accepted by merchants worldwide, while others can be used only at specific retailers. Common types include:
General-purpose credit cards. These cards operate on payment networks such as Visa (V), Mastercard (MA), American Express (AXP), and Discover, allowing cardholders to make purchases wherever their networks are accepted.
Secured credit cards. Often used to establish or rebuild credit, secured cards require a security deposit that typically helps determine the cardâs credit limit. Unlike prepaid cards, they allow cardholders to borrow money and may help establish a credit history when account activity is reported to credit bureaus.
Store credit cards. Issued in partnership with retailers, these cards may offer discounts or rewards on store purchases. Some can be used only at the issuing retailer or affiliated stores, while others operate on major payment networks and are accepted more widely.
These categories can overlap. A general-purpose credit card, for example, may also offer rewards. Traditional charge cards are another type of payment card, generally requiring the balance to be paid in full each month rather than allowing cardholders to carry a balance.
Your credit history creates a âstoryâ of you.
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History of credit cards
Early credit cards and the rise of payment networks
Credit cards originated in the United States during the 1920s, when businesses such as oil companies and hotel chains began issuing cards that customers could use to make purchases at their establishments. These early cards generally couldnât be used at other businesses.
In 1950, Dinersâ Club, Inc. introduced the first widely accepted multipurpose charge card, which could be used at a variety of restaurants and other businesses. American Express followed in 1958 with its travel and entertainment card. Unlike modern revolving-credit cards, these early charge cards generally required customers to pay their balances in full each month. Card issuers collected fees from participating merchants and, in some cases, annual fees from cardholders.
A major development came in 1958, when Bank of America (BAC) introduced BankAmericard in California. Unlike traditional charge cards, BankAmericard allowed customers to carry unpaid balances from month to month, with interest charged on the amount owed. Bank of America began licensing the program to banks in other states in 1966, expanding the networkâs reach. BankAmericard was renamed Visa in 1976.
Other banks developed competing credit card programs, including Master Charge, which became MasterCard in the late 1970s, later changing its spelling to Mastercard. As regional banking networks expanded and became interconnected, credit cards could increasingly be used across the United States and internationally. Other major card brands emerged or expanded, including Japanâs JCB, Discover in the United States, and Barclaycard in the United Kingdom.
Expansion, consumer protections, and modern payments
The expansion of credit card networks in the late 20th century transformed consumer borrowing, making it easier to purchase goods and services without paying the full cost upfront. Interest on unpaid balances became an important source of revenue for card issuers, alongside fees paid by merchants and cardholders. For merchants, credit cards offered a way to accept purchases on credit without having to extend credit directly to customers.
Widespread credit card use also raised concerns about consumer debt. Cardholders who carried balances could face substantial interest charges and fees, particularly if they missed payments. During the global financial crisis of 2008â09, rising unemployment and financial hardship contributed to an increase in credit card delinquencies and defaults.
Congress responded to concerns about credit card industry practices by passing the Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly known as the CARD Act. The legislation, which was also referred to as the Credit Card Holdersâ Bill of Rights, strengthened consumer protections by restricting certain interest rate increases and fees, requiring clearer disclosures, and establishing additional protections for younger cardholders.
Advances in electronic payment processing further transformed credit card use. Magnetic stripes helped replace manual transaction processing, while embedded chips improved security. The growth of online shopping made credit cards an important payment method for purchases made over the Internet. Contactless cards allow consumers to pay by tapping a card at a payment terminal, while digital wallets enable payments in stores and online.
