What is a credit card?

A credit card can allow you to borrow money and continue to pay it back as long as the account is open. While it’s not the only way to pay bills or make purchases, when used responsibly, a credit card can help you to build your credit.

There are different types of credit cards, and they all start with applying and getting approved. But first, it’s helpful to know more about the credit card options—and how they work—to see what’s right for you.

What you’ll learn: 

• Credit cards allow cardholders to pay by borrowing money from a credit card issuer, up to a certain amount, and repaying it continuously.
• When used responsibly, a credit card can help cardholders to build credit. 
• Cardholders can usually avoid or minimize paying interest by paying off their balance or paying more than the monthly minimum payment.
• There are many different types of credit cards, including unsecured cards, secured cards, rewards cards and retail or store cards.
• As you prepare to apply for a credit card, it’s a good idea to check your credit, compare cards, consider getting pre-approved and only apply for credit you need.

A credit card is a plastic or metal card that allows you to make purchases in person, over the phone or online. You might also be able to pay with your credit card by using a digital wallet or virtual card numbers. Because you can borrow and pay money back continuously, credit cards are a form of revolving credit. 

It’s important to know some of the key credit card terms when considering a credit card.

The credit card issuer is the bank or financial institution that provides credit cards and lends approved cardholders money. The issuer approves or declines applications and sets card terms, like credit limits.

The credit card network processes credit card transactions. The major credit card networks are Visa®, Mastercard®, Discover® and American Express®.

The interest rate is what a cardholder might pay the card issuer to use their credit card and borrow money. The rate can depend on the card and the cardholder’s credit history. To avoid interest, a cardholder could pay off their full balance each billing cycle.

The APR is usually the same as the interest rate for credit cards. APR can change based on the types of transaction, such as balance transfers and cash advances. And some cards might offer promotional APRs, which offer lower rates for a limited time.

The credit limit determines how much a cardholder can borrow. Credit card issuers usually set a credit limit based on factors like the cardholder’s income, credit history and debt.

Some credit cards have an annual fee that cardholders pay each year to use them. A rewards credit card that provides benefits and perks might have an annual fee.

A credit card balance is the amount the cardholder has spent and currently owes on the credit card. It changes each time the card is used but may not include pending transactions.

The statement balance is what the cardholder owes at the end of a billing period. This could include the credit card balance, balances carried over from a previous month and any interest or fees.

Available credit is the amount of money a cardholder can access. It’s the difference between the credit card limit and the current balance.

There are many different types of credit cards available, and some of them fall into more than one category. Here are some of the main categories: 

• Unsecured credit cards: These might be what you think of when it comes to traditional credit cards and don’t require collateral or a deposit to open an account.
• Secured credit cards: These credit cards require a security deposit to open the account and can be helpful for cardholders who are building their credit history. Cardholders will usually receive the deposit back when the account is closed or upgraded to an unsecured credit card.
• Rewards credit cards: With these credit cards, cardholders typically earn cash back, miles or points with their purchases. 
• Retail or store credit cards: Cardholders can open these credit cards with a retail store or brand and earn rewards or perks when making purchases with the store or its affiliates.

Before applying for and using a credit card, it can be helpful to know how credit cards work. When cardholders use their credit card, they’re borrowing money from the card issuer. The card network helps process the payment. Each month, cardholders receive statements with a minimum amount that’s owed by the bill’s due date. And if a cardholder pays off their entire balance, they could avoid paying interest. 

Like any form of credit, credit cards have pros and cons to keep in mind.

Some of the advantages of using credit cards can include: 

• Financing large purchases: If you don’t have cash on hand to make a bigger purchase, a credit card could provide the funding you need at the time. But you’ll still need to pay off the balance. 
• Helping to build credit with responsible use: By doing things like making payments on time, you can build your credit. Credit card issuers typically report cardholder activity to credit bureaus. That activity can appear in your credit reports, which credit-scoring companies use to calculate your credit scores.
• Earning rewards: If you have a rewards credit card, you could earn rewards for making purchases with your card. And you might be able to redeem those rewards for things like cash, gift cards and travel purchases.
• Fraud and security protections: Many credit cards come with protections like being able to use a digital wallet and limiting how much you’re liable for if any unauthorized purchases are made. For example, Capital One cardholders have benefits that include $0 fraud liability for unauthorized purchases, virtual card numbers, card lock and security alerts.

If credit cards aren’t used responsibly, it could lead to added debt, accrued interest and lowered credit scores. But by doing things like making the minimum monthly payments and spending within your budget, you can avoid these outcomes.

The costs and fees can vary by card. So it’s a good idea to review the Schumer box, which outlines the costs, in a card’s terms and conditions. Here are some you might find:

• Interest: This is the cost to borrow money. But if you pay off your balance in full, you could avoid paying it.
• Annual fees: Some cards come with a yearly fee. By weighing the benefits that usually come with these cards, you could decide if the fee is worth it.
• Foreign transaction fees: If you use your card to make purchases in or from another country, you might have to pay a foreign transaction fee. But that’s not the case for Capital One U.S. cardholders. View important rates and disclosures.
• Penalty APR: If you make a payment that’s at least 60 days late, you could be charged a penalty APR. And that APR could be temporary or permanent. 

If you’re ready to apply to get a credit card, there are a few initial steps you may want to follow: 

1. Check your credit score. Before applying for a credit card, it’s a good idea to check your credit to see where it stands. You can access your TransUnion® credit report and VantageScore® 3.0 credit score for free with CreditWise from Capital One. You can also check your credit reports from the three major credit bureaus at AnnualCreditReport.com.
2. Compare credit cards. Once you know your credit score, start seeing what options you may have and consider what you’re looking for—whether it’s a way to build credit, earn rewards or something else.
3. Consider pre-approval. Getting pre-qualified or pre-approved can allow you to see what credit cards you may be eligible for before applying. Capital One offers pre-approval that’s quick and won’t hurt your credit.
4. Don’t apply for too many credit cards at once. When you apply for a credit card, it typically triggers a hard inquiry, which can affect your credit scores. That’s why the Consumer Financial Protection Bureau recommends only applying for credit that you need.

Here are some common questions about credit cards.

Credit cards can allow you to borrow money and build credit when they’re used responsibly. But it’s helpful to learn about credit cards, how they work and their terms before applying for one.

If you’re building or rebuilding your credit, you can compare Capital One credit cards for fair credit. And before officially applying, consider getting pre-approved to see what cards you might be eligible for. It’s free and won’t affect your credit.