What is a credit card?

A credit card lets you borrow money and pay it back as long as the account is open and in good standing. Because you can borrow and pay money back continuously, credit cards are a form of revolving credit. 

There are different types of credit cards, and they all start with applying and getting approved.

What you’ll learn: 

• A credit card is a form of revolving credit, enabling you to borrow money from a card issuer and pay it back continuously, provided the account remains in good standing.

• When used responsibly, such as by making timely payments, a credit card can be a tool for building credit.

• To understand how credit cards work, it helps to know about credit card issuers, credit card networks, annual percentage rates, credit limits and other terms.

• Credit cards come in different types, including unsecured, secured, rewards, retail and business cards.

Before applying for and using a credit card, it can be helpful to know how credit cards work. When you use a credit card, you’re borrowing money from the card issuer. The card network helps process the payment. You’ll receive a statement each month with a minimum amount you owe by the bill’s due date.

One of the main differences between debit cards and credit cards is where the money comes from. With a debit card, the money you use comes from your checking account, and you’re usually only able to spend what’s in your account. With a credit card, you’re borrowing money from a card issuer.

It’s helpful to learn some of the key credit card terms when considering a credit card:

• Credit card issuer: This is a bank or financial institution that provides credit cards and lends money. The issuer approves or declines applications and sets card terms, like credit limits.

• Credit card network: Credit cards are part of a network that processes credit card transactions. The major credit card networks are Visa®, Mastercard®, American Express® and Discover®.

• Interest rate: This is the amount the card issuer charges to use its credit card and borrow money. The rate can depend on the card and your credit history. One way to avoid or minimize interest charges is to pay off your statement balance every month.

• Annual percentage rate (APR): This is the total cost of borrowing after fees and other costs are included. The APR is usually the same as the interest rate for credit cards. APR can change based on the type of transaction, such as balance transfers and cash advances. Some cards may offer promotional APRs, which offer lower rates for a limited time.

• Credit limit: This is how much you can borrow. Credit card issuers usually set a credit limit based on factors like income, credit history and debt.

• Annual fee: Some credit cards require an annual fee to use the card each year. For example, a rewards credit card that provides benefits and perks might have an annual fee.

Before applying for and using a credit card, it can be helpful to think about what you want out of one. 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 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. With a Capital One credit card, you have access to benefits that include $0 fraud liability for unauthorized purchases, virtual card numbers, card lock and security alerts.

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

• Unsecured credit cards: These are 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 building credit history. When the account is closed or upgraded to an unsecured credit card, the deposit is typically returned.

• Rewards credit cards: With these credit cards, you can typically earn cash back, miles or points with your purchases.

• Retail or store credit cards: You 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.

• Business credit cards: If you’re self-employed or a small-business owner, having a business card can help keep business and personal expenses separate.

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:

• 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 credit cards. 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 scores. You can access your credit report and credit score for free with CreditWise from Capital One to get an idea of where you stand. 

2. Check pre-approval. Seeing if you’re pre-approved could help you compare options and see what credit cards you may be eligible for before applying.

3. 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 (CFPB) recommends only applying for credit that you need.

If you’re still working on your credit, it’s possible to get a credit card. One option might be a secured credit card, which could be easier to be approved for because it requires a refundable security deposit as collateral.

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. You can also check whether you’re pre-approved. It’s free and won’t affect your credit scores.