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How do credit cards work?

You may have heard that a credit card can be a great financial tool - but you’ve never used one before and don’t know much about them or how they work. Before applying for one, let’s look at how credit cards work.

19 May 2023Isabelle Coetzee 5 min read
Using credit card near laptop

Check your credit card offers

All the offers you see on ClearScore are tailored to your credit score and financial circumstances.

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There are many benefits to be had when using a credit card. However, credit cards can also be a tempting outlet for wasteful spending and leave you burdened by debt when used without careful consideration.

Understanding the difference between debit and credit cards is crucial when learning how credit cards work. While they both allow you to make purchases, they work differently. A debit card is linked to your checking account, and any purchase you make is deducted directly from the account. But if your checking account is low on funds your transaction will be declined.

On the other hand, a credit card works as a loan card. When you make a purchase, you borrow money you will repay, plus interest and fees. While a debit card only allows you to spend money you already have, a credit card can help you establish credit and may lead to an improved credit score with responsible use.

A credit card offers a convenient way to borrow money from a financial institution such as a bank to make purchases. It comes in the form of a plastic card, and the maximum amount you can borrow is based on your credit history and income.

A credit card can help you purchase items or services at stores and online retailers or book hotel or travel reservations. However, you’ll need to pay back what you’ve borrowed every month, and failing to pay the minimum amount may result in charges for fees and interest.

Some credit cardholders may have access to rewards programs that offer perks like cash back and travel points. However, before taking out a credit card, it's crucial to understand the terms and fees of the card to avoid any negative impacts on your credit score.

The type of credit card you choose may affect how your credit card works.

Different types of credit cards are available in the market. Apply for the one that suits your needs, as each type of credit card has its benefits, rewards, and fees.

1. General purpose credit cards

The most common type of credit card that can be used for almost any purchase. They usually offer rewards programs for cashback, points, or miles.

2. Secured credit cards

An option for those looking to build their credit score or if you have little or no credit history. This type of credit card is secured with collateral in the form of an asset owned by the borrower that can be used to cover any unpaid debt.

3. Business credit cards

Designed for entrepreneurs who want to keep their expenses separate from their business expenses.

4. Premium credit cards

Offer exclusive benefits and rewards to frequent travelers, such as airport lounge access, concierge service, and travel insurance.

Irrespective of your lifestyle or financial goals, find a card suitable for your needs once you understand how credit cards work.

If you have a credit card, you’ll need to come to terms with credit card fees. Although considered an inconvenience, these fees are a necessary evil, providing the convenience of having a credit card. Late payment charges and annual fees are just a few examples of fees that can affect your credit score and rapidly accumulate.

Understanding interest rates when it comes to credit cards is a must. These rates are the fees charged by lenders when you borrow money using your credit card, and they’re a vital part of credit card agreements. Generally, your creditworthiness determines the interest rate you'll get with a credit card, and the higher your credit score, the lower the interest rate you'll pay.

As interest rates can significantly affect the amount you pay in interest each month, it's good to be mindful of them when selecting a credit card. You should watch your interest rates and pay back what you owe on time, as this could increase your credit score and save you money on interest charges.

Before selecting a credit card, find out what fees may apply. Some credit cards may have higher charges when compared to others, but they often offer more benefits and rewards. You’ll need to read the fine print carefully and weigh the pros and cons of each card to find the credit card that best suits your financial goals and budget.

To avoid unwanted fees and debt, it’s equally important to budget appropriately and pay the balances on time. With the right approach and knowledge, you can understand how credit cards work, and managing them becomes easier.

1. Monthly service fee

This fee is charged to the cardholder each month to cover maintaining the account. Some credit card companies may waive this fee depending on the type of card and the amount of spending on the card each month. The specifics of your credit card's monthly service fee can help you decide if it’s worth keeping the card and its benefits or if it’s time to consider a different card with fewer fees.

2. Initiation fee

When you apply for a new credit card, you may have to pay a once-off initiation fee. These fees enable credit card companies to assess applicants, distribute and maintain cards, and support their networks. Accepting a reasonable initiation fee could assist you in obtaining the card you require to manage your finances better. The benefits of a great credit card can outweigh the costs associated with initiation fees.

3. Interest charges

A credit card interest rate represents the fee for borrowing funds from the card provider. As the interest rate increases, the amount paid in interest charges goes up, specifically for cardholders carrying balances. Your interest rate is determined by the card type and credit score and is indicated as a percentage. While some cards may offer a zero percent interest rate for a specified time, pay what you owe on your credit card as quickly as possible to avoid steep interest charges on the outstanding balance.

4. Late payment fee

Late payment fees for credit cards are penalties imposed when you fail to make the minimum payment due date on your credit card statement. The exact fees vary depending on the balance owed and the card provider. Try to avoid missing payments because it could negatively impact your credit score.



Builds credit and could improve your credit score.

You may spend more than you can afford to repay.

Rewards and perks from using your credit card accumulate with time.

You may get charged a high-interest rate.

Convenient because you don’t have to carry cash and can purchase online or over the phone.

You may miss out on rewards.

Fraud protection if your card is lost or stolen. You can cancel the card and have another issued. You can also dispute fraudulent charges and possibly get re-imbursed.

You may have fraudulent charges that go unnoticed.

If used responsibly, a credit card can improve your credit score by showing lenders that you’re a reliable borrower who can manage your debt effectively.

1. Make consistent and timely payments.

2. Maintain a low credit use rate of 30-70%.

3. Only use your credit card for necessary expenses.

4. Only apply for a credit card when you understand how credit cards work.

5. Don’t apply for too many cards over a short time. It could show lenders that you are desperate for money and lessen the chance of approval.

With these practices, you can establish healthy habits that create a strong foundation for your credit score.  A credit card can be valuable for building and maintaining excellent credit.

You can get a credit card when you apply online or in person with a bank or issuer. First, do your homework and research options to find the card that meets your financial needs. Pay attention to fees, interest rates, and reward programs.

When applying, you’ll need the following information:

1. Personal ID.

2. Income statement.

3. Employment details.

4. Credit history in the form of a credit report.

Once your application is approved, use your credit card wisely by only charging what you can afford to pay off in full and making regular payments on time.

You could make your life easier by applying for a credit card through ClearScore.

1. Create an account and verify your identity.

2. Select from a variety of credit card offers made that are tailored to your needs.

3. After comparing credit card offers and understanding how credit cards work, pick the best one and complete the online application form.

4. Your application will be forwarded to the corresponding credit card provider to assess eligibility. Once your application is approved, you’ll receive your new credit card within a few working days.

The process is straightforward and uncomplicated, making it easier to get your ideal credit card through ClearScore.

Isabelle Coetzee Image

Written by Isabelle Coetzee

Freelance Copywriter

Isabelle is a freelance finance writer and journalist in Cape Town. She helps make managing your personal finances calm, clear and easy to understand.