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How do credit cards work?

If you're new to credit, you may wonder how credit cards work. Here's a guide on how credit cards work, so you can get the most value from using a credit card.

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If you've never had a credit card before, you may wonder just how they work and what responsibilities you have as a cardholder.

Credit cards are essential if you're looking to build credit, and they're also a convenient way to pay for everyday purchases, earn rewards and more. However, it's essential to use them responsibly in order to avoid incurring interest charges, late fees and risk falling into debt. But if you understand how credit cards work, you can prevent any potential negative effects and reap the rewards of using a credit card.

Below, CNBC Select explains how credit cards work, so you can get the most value from using yours.

How do credit cards work?

How to use a credit card

A credit card can be used to pay for new purchases by swiping, tapping or inserting your card into a payment terminal, or entering your account info online. You may also be able to use a mobile wallet, such as Apple Pay or Samsung Pay.

Once you make a purchase, it will show up as "pending" on your account balance. Purchases typically take a few days to post, at which time the purchase amount will be added to your total balance.

Every month, you'll receive a bill, which is comprised of all posted purchases for the past 27 to 30 days (depending on the length of your billing cycle). Your bill is due on the same date every month. You'll typically have a grace period, which is a minimum of 21 days from the end of a billing cycle, where you can pay off your balance interest-free. Any payments after the grace period will incur interest charges.

You have the option to make the minimum payment, often $25 or $35, or any other amount up to your total balance. We recommend always paying on time and in full to avoid interest and fees.

Common credit card terms

Familiarize yourself with these common credit card terms prior to using a credit card.

  • Annual fee: The yearly fee charged for holding a credit card. Some cards may have no annual fee or waive the annual fee for the first year.
  • Balance transfer APR: This is the interest rate applied to balance transfers and may be equal to or greater than the purchase APR.
  • Balance transfer fee: If you transfer debt from one credit card to another, you may incur a fee that's 3% to 5% per transfer with a minimum of $5 or $10.
  • Cash advance APR: The interest rate you incur if you take out a cash advance. This rate is often one of the highest APRs you can be charged, and cash advances incur interest immediately with no grace period.
  • Cash advance fee: When you take out a cash advance, you'll likely incur a fee of 5% or $10, whichever is greater.
  • Foreign transaction fee: Purchases made outside the U.S. may incur a fee per transaction, usually 3%. (Check out the best credit cards with no foreign transaction fees if you want to avoid this fee.)
  • Late payment fee: If you pay your credit card bill late, you'll incur a fee of up to $40. (Read more about what happens when you miss a credit card payment and when a credit card payment is considered late.)
  • Minimum payment: The smallest amount of money you have to pay each month to keep your account current is the minimum payment.
  • Penalty APR: When you pay late, card issuers may penalize you with an interest rate that's higher than your regular APR.
  • Purchase APR: The interest rate charged on new purchases.

Credit card benefits

Credit cards are more than a convenient way to pay for purchases. Many card issuers provide added perks, such as rewards and special financing that make credit cards one of the most beneficial payment options.

Below, we list benefits that may be offered by your credit card. Review your cardholder agreement for the exact perks provided by your card.

  • Build credit: Credit cards are a smart way to build credit or improve a less-than-stellar credit score. Unlike debit cards, which don't affect your credit score, credit cards report activity to the three main credit bureaus — Experian, Equifax and TransUnion. So if you use your credit card responsibly, you can see a positive impact on your credit score. (Read more about how to check your credit score for free.)
  • Rewards: Many of the best credit cards offer cash back, points or miles on all purchases, allowing you to maximize rewards by simply paying with a credit card. Check out the best rewards credit cards and best cash-back credit cards.
  • Welcome bonuses: Some credit cards offer competitive welcome bonuses that can be worth upwards of $500 when you spend a certain amount of money within the first few months of account opening.
  • Shopping discounts: Select issuers, such as American Express, Chase and Bank of America, offer exclusive shopping discounts at dining, retail and travel merchants. These offers typically give you either bonus rewards points or a percentage or set dollar amount of cash back credited to your account.
  • Annual statement credits: Card issuers may provide annual statement credits in select categories. For example, the Chase Sapphire Reserve® offers an annual $300 travel credit, and some travel rewards cards offer Global Entry or TSA PreCheck application fee credit.
  • Special financing: Many credit cards offer intro APR periods that charge no interest for a set length of time. During the intro period, you may benefit from no interest on new purchases, balance transfers or both. These offers are a great way to save on interest charges and get out of debt. (Check out some of the best balance transfer credit cards and best no-fee balance transfer cards.)
  • Additional benefits: Credit cards may come with added protections, such as extended warranty coverage, return protection and travel insurance, plus lounge access and extra hotel amenities that increase the benefit of paying with a card.

How to get a credit card

Once you've decided to open a credit card, you can begin the search for the best credit card for your needs. We recommend checking your credit score first, so you know where you stand and what cards you might qualify for.

Once you know your credit score, you can shop around for the best credit card offers. There are cards for all types of needs, such as getting out of debt with a balance transfer card like the Citi Simplicity® Card (see rates and fees), to earning travel rewards with the Chase Sapphire Preferred® Card or cash-back with the Citi Double Cash® Card (see rates and fees.)

When you've settled on the credit card you want to open, make sure to read the fine print so you're aware of any fees and important terms. After, you can submit an application and potentially receive a decision in as little as 60 seconds, though it may take longer.

Read more about how to get a credit card in five steps.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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