How Do Credit Cards Work?

Get a closer look at how credit cards work and how to choose the right card for you

Credit cards can give you a fast, convenient way to pay. But after you swipe, dip or tap your card, what happens behind the scenes? How exactly does a credit card work? And why use a credit card, anyway? 

Keep reading to find out what a credit card is, how it works, the benefits of using credit cards and more. 

What Is a Credit Card?

A credit card is a type of revolving credit account. That means you can spend and pay down the money you’re borrowing repeatedly while the account is open. Revolving credit accounts don’t have a set end date. As long as the account stays open and in good standing, you can keep using it.

When you’re approved for a credit card, the lender sets a credit limit. That’s the maximum amount you can charge to the account. 

Every time you make a purchase, the amount you charge is subtracted from your credit limit. The amount you’re left with is your available credit. And when you make a payment, your available credit goes back up.

You also might be wondering: What's the difference between a credit card and a debit card? The biggest difference is where the money comes from when you make a purchase. With a credit card, you’re borrowing money, while a debit card pulls funds directly from your linked bank account.

Meet the Cast of Characters 

To understand how credit cards work, it helps to know that several players are keeping the system moving:

  • Your bank, or card issuer, provides you with a credit card, making you a cardholder.
  • The payment network—think of Visa® or MasterCard®—connects your card with millions of businesses that accept credit card payments. That’s why you might see two logos on your card: one for your card issuer and the other for the payment network. 
  • The merchant is the business where you’re making a purchase. It could be a grocery store, a gas station, an online store or millions of other businesses. 
  • The acquiring bank handles the merchant’s transactions. Acquiring banks connect the dots of a credit card purchase between the cardholder, the card issuer, the payment network and the merchant. 

How Credit Cards Work

Now you know the main players. But how does using a credit card actually work behind the scenes? 

Say you’re checking out at the grocery store, and you decide to pay with your credit card. Here’s how the credit transaction works, step by step:

  1. You swipe, insert or tap your credit card—or mobile device, if you’ve added your card to a digital wallet
  2. The card reader sends your account information to the acquiring bank. 
  3. The acquiring bank uses a payment network to get authorization from your card issuer. 
  4. Your card issuer authorizes the transaction, and it sends the money through the payment network to the grocery store’s bank.

That might sound like a lot of steps, but the entire process typically only takes a few seconds.

What’s on Your Credit Card Statement?

When you get your credit card statement, it will include the amount you charged at the grocery store. You’ll ultimately owe that amount—plus any other purchases you made, any interest that might be charged, fees and previous unpaid balance—to your bank or card issuer. 

Keep in mind that while you might only have to make a minimum payment, the Consumer Financial Protection Bureau recommends paying as much of your full balance as you can each month. 

So Why Use Credit Cards? 

There can be many advantages of using credit cards, as long as they’re used responsibly. They include:    

  • Help Building Credit. By using a credit card responsibly, you might be able to build or rebuild your credit history and improve your credit score. A good credit score can help you get better interest rates for things like car loans, personal loans and mortgages. Responsible use includes always paying your bills on time and keeping your credit utilization ratio low. 
  • Budgeting. Your credit card comes with a useful budgeting tool: the monthly statement. Your monthly statement is like a diary that shows your spending habits. It can help you figure out where your money goes so you can create a realistic budget based on that and your income. You can also typically access your monthly statement and manage your account online to make things even easier. 
  • Convenience. Credit cards give you a fast, convenient way to pay. And now, many cards even feature contactless technology. That means all you have to do is tap your card on a contactless-enabled reader to make a purchase. You can also add your credit cards to your digital wallet to give you even more fast, secure ways to pay online or in person.
  • Credit Card Rewards. Earning rewards can be an advantage of using a credit card. And you might be able to find a rewards card that fits your spending habits and specific needs. 
  • Fraud Protection. Unfortunately, credit card fraud can happen to anyone. But the good news is that many credit cards offer fraud protection and security features to help you keep your credit card more secure. While these protections vary by issuer, they might include things like $0 fraud liability if your card is ever lost or stolen, security alerts, card lock and virtual card numbers.

Types of Credit Cards 

Whether you have excellent credit or you’re still working to improve your credit score, you can find a card that’s right for you. 

Here are some types of credit cards to consider: 

  • Cash Back Credit Cards. Depending on the card, cash back credit cards can reward everyday spending on things like groceries, gas, dining and entertainment. For every qualifying purchase, you earn back a percentage of what you spend. And then you can redeem those rewards in various ways, depending on the card issuer. 
  • Travel Rewards Credit Cards. When you use a travel credit card, you might earn the most rewards for travel-related purchases. But depending on the type of travel credit card, some offer good rewards rates on general purchases too. Then, you can generally redeem those rewards for travel expenses like flights and hotels. Keep in mind that some travel cards are co-branded, meaning they’re tied to a specific airline or hotel. And you might only be able to redeem rewards at those places. Cards that aren’t co-branded might offer more flexibility when it comes to earning and redeeming rewards. 
  • Secured Credit Cards. If you’re new to credit or rebuilding it, a secured credit card may be an option. With a secured card, you put down a security deposit that’s held by the card issuer as collateral. Then, you can use the card just like you would any other. And you could earn the deposit back by using your card responsibly or when you close the account and pay your balance in full. 
  • Student Credit Cards. Student credit cards are often tailored to the college crowd. They may be easier to qualify for than many other credit cards and often offer benefits that are relevant to students. Student credit cards can help build credit history and encourage financial independence. But that’s only when they are used responsibly. 

These are just some of the types of credit cards out there. There are also business credit cards, cards with no annual fee, cards that offer low or 0% introductory rates and more. 

Choosing the Right Credit Card for You 

Now that you know more about the different types of credit cards, you might be wondering: How do I choose the right card for me? 

First, it’s important to know that applying for credit cards can trigger hard inquiries into your credit. And too many hard inquiries in a short period of time can hurt your credit score. That’s why it’s important to do your research before you start applying for credit cards. 

You might want to think about things like what cards match your credit score, APR, fees, whether you want to earn rewards and more. It’s also a good idea to make sure you understand the terms of any credit card you’re thinking of applying for. 

Capital One has a credit card comparison tool that helps you search by credit requirements, rewards type and other factors to find the right credit card for you.

And with pre-approval from Capital One, you can find out if you’re eligible for a credit card before you even apply. It’s quick and won’t hurt your credit score.

Monitor Your Credit 

Knowing how credit cards work is important. And so is knowing the importance of regularly monitoring your credit.

One way to monitor your credit is with CreditWise from Capital One. CreditWise gives you access to your free TransUnion® credit report and weekly VantageScore® 3.0 credit score any time. And using it won’t hurt your scores. You can even explore the potential impact of your financial decisions—before you make them—with the CreditWise Simulator.

CreditWise is free and available to everyone—even if you’re not a Capital One customer.

You can also get free copies of your credit reports from all three major credit bureaus—Equifax®, Experian® and TransUnion. Call 877-322-8228 or visit to learn more. Keep in mind, there may be a limit on how often you can get your reports. You can check the site for more details.

Learn more about Capital One’s response to COVID-19 and resources available to customers. For information about COVID-19, head over to the Centers for Disease Control and Prevention

Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

The information contained herein is shared for educational purposes only, and it does not provide a comprehensive list of all financial operations considerations or best practices.

Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many credit scoring models. It may not be the same model your lender uses, but it can be one accurate measure of your credit health. The availability of the CreditWise tool depends on our ability to obtain your credit history from TransUnion. Some monitoring and alerts may not be available to you if the information you enter at enrollment does not match the information in your credit file at (or you do not have a file at) one or more consumer reporting agencies.

The CreditWise Simulator provides an estimate of your score change and does not guarantee how your score may change.

Visa is a registered trademark of Visa International Service Association and used under license.

Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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