How credit cards work

By Ryan Bayonnet - This lesson explains how credit cards work and how they can be used to your benefit.


Credit cards are a great way for an individual to begin building credit. If used correctly, credit cards can be a very convenient way to make daily purchases, receive spending benefits, and protect against fraudulent activities.

Line of Credit

A credit card is essentially a line of credit, allowing cardholders to borrow funds to pay for goods and services. Cardholders must pay back the borrowed money, plus interest each month.

Credit Limit

Each cardholder has a credit limit, or total amount of money that the lender allows the cardholder to borrow. The longer you have a credit card and the higher your income goes, your credit limit will more than likely increase.


At the end of the billing period, if the cardholder has not paid off their entire credit card balance, they will be charged interest. As interest rates typically range between 8.99% - 24.99%, cardholders need to be careful to avoid paying excessive interest charges.


Using a credit card effectively can positively affect your financial life and allow you to build credit early. However, it is important to be careful to not abuse this financial tool as the ramifications can be severe.

What's Next On Credit?

Next Story: Selecting a Credit Card

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