Credit Cards Explained: How Do Credit Cards Work?
Credit cards are an important part of your financial management, and a popular payment option, but it's common to have questions about how they work — especially if you've never had one before. With credit cards explained, you'll be ready to make smart decisions when making purchases while also managing your debt better.
How Do Credit Cards Work?
You probably already know how to use a credit card: Slide, insert, or tap the card and your purchase is paid for. But behind the scenes, much more is happening. Each time you use your card, you are actually taking out a small loan from your credit card issuer.
When you get approved for a credit card, the credit card issuer sets a credit limit, which is the maximum amount you can borrow. Your credit card issuer determines the limit by reviewing your credit history, including your credit score.
When you make a credit card purchase, you are borrowing money from the credit card issuer and they pay the merchant directly. That payment gets added to your credit card "balance," or the amount you owe your credit card issuer. You are then responsible for paying that balance back to the credit card issuer. To pay back that balance, you can make minimum payments, pay a larger portion, or pay off the entire balance every month.
What Are Some Common Credit Card Fees?
Different credit cards have different fees. Examples of credit card fees include:
- Annual card fees: These are fees you pay to keep the card open. There are some cards that don’t have annual fees, like the Key Cashback® credit card, and some that waive the fee when certain requirements are met.
- Balance transfer fees: Fee(s) you would pay to move an existing balance from one credit card to a new one.
- Cash advance fees: This is a fee you would pay if you use your credit card to borrow cash instead of buying something with the card directly.
- Foreign transaction fees: These fees occur when you make purchases in a foreign country.
- Late payment fees: These fees would be incurred if you do not make payments by the date on your monthly statement.
Some credit card issuers waive fees if certain criteria are met — like if you have a checking or savings account open with the same financial institution.
What Is a Minimum Payment?
A minimum payment is the least amount that you, the cardholder, must pay back every month to avoid incurring late fees. The minimum payment can vary depending on the card but is usually based on your balance or your outstanding interest. For example, some cards may state that your minimum payment is a percentage of your credit card balance, while others might have a set dollar amount.
While making the minimum payment can help prevent credit card fees, it can keep you in debt longer while interest continues to add up. In fact, it could take years to pay off credit card debt using only the minimum payment. If you're able to, it's recommended to pay off your balance in full each month so you can avoid incurring large amounts of interest. If you can’t pay off the full balance, consider making extra payments each month as you can, setting up automatic payments from a bi-weekly paycheck, or using digital tools like EasyUp®.
Which Credit Card Is Best?
There are many kinds of credit cards available for different types of borrowers. Finding the credit card that works best for you depends on your needs, spending habits, and credit history. Many financial institutions and credit card issuers offer options for starting out with your first credit card. When comparing credit cards, remember to check each card’s fees, rewards or benefits (such as travel points or cashback), and the annual percentage rate (APR) and interest rate. And ask questions — Key’s experienced bankers are happy to help.
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