How Credit Cards Work


When you use a credit card, you can borrow up to a certain amount, called your credit limit. When you repay the portion of the credit line you've borrowed, you can borrow it again. That's why this type of borrowing is called revolving credit.

For example, if you have a $1,200 credit limit and use your card to make a $300 purchase, your available credit is $900. If you don't charge anything else and repay the $300 when it is due, your available credit is again $1,200.

The lender that issued the card sets your credit limit, which may increase or decrease over time depending on how you use credit and repay what you borrow.

BILLING STATEMENTS

The card issuer sends you a monthly billing statement that tells you:

  • What you owe, called your outstanding balance
  • The minimum payment you must make — though it's always smart to pay the full outstanding balance
  • The due date by which payment must be made
  • How much of your available credit you are using
  • What you spent and where you spent it
  • How long it will take you to pay off your balance if you pay less than the full amount and how much you'll pay in interest

If you paid only part of the previous balance, the amount you didn't pay will be included in the new balance due. So will an interest charge, sometimes called a finance charge. It's figured by multiplying 1/12th of the annual percentage rate (APR) times your outstanding balance.

Ideally, you should never charge more than you can afford to repay in full when the bill arrives.

You can see a sample credit card statement here.
 
Always keep your outstanding balance well below your credit limit. That helps your credit score.