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How does a credit card work?
Quick answer
A credit card lets you borrow money from a bank, up to a limit, to pay for things and repay later. The bank pays the merchant instantly; you repay the bank — interest-free if you clear the balance by the due date, with interest if you don't.
Step by step
- The bank extends a revolving credit line up to a set limit.
- Each purchase is a short-term loan the bank pays the merchant for.
- Pay the full balance by the due date → no interest.
- Carry a balance → high compound interest accrues.
People also ask
How does a credit card work?
You borrow from the bank for purchases up to a limit and repay later; clearing the full balance on time avoids interest.
What is APR?
Annual Percentage Rate — the yearly interest charged on balances you don't pay off.
How is a credit card different from a debit card?
A debit card spends your own money instantly; a credit card borrows the bank's money to repay later.
Part of the guide: Money Basics: Save, Borrow & Invest →