How Credit Cards Work

The story: Jade’s first statement

Jade reads a first credit card statement on a phone, with the statement balance, the minimum payment and the due date.

1. Narrator: Jade is 18 and just got a first credit card. The first statement arrived.
2. Jade: Statement balance: $300. Minimum payment: $25. Due in 3 weeks. Can I just pay the $25?
3. Narrator: If Jade pays the full $300 by the due date, there’s no interest. The time before interest starts is the grace period.
4. Narrator: Pay only the minimum, and interest is charged on the rest. On bigger balances, minimum payments can drag on for years.
5. Jade: What about getting cash from the card at an ATM?
6. Narrator: That’s a cash advance: a fee right away, and interest from day one, with no grace period.
7. Narrator: Pay the statement balance in full, every time, and a card costs no interest.

What you’ll learn

1. Read the statement

   Each month a statement shows three things. The statement balance is what you owe for that cycle. The minimum payment is the least that keeps the account in good standing. The due date is when it’s due. A late payment can bring a fee and hurt your score.

2. The grace period

   The grace period is the time between the statement and the due date. Pay the full statement balance by the due date, and purchases cost no interest. Pay less, and interest is charged on what’s left.

3. The minimum payment trap

   Interest is set by the card’s APR: the yearly cost of borrowing, as a percent. Minimum payments are mostly interest at first, so the balance shrinks slowly. Paying only the minimum can stretch a balance over years and cost far more than the purchase did.

4. Cash advances, fees and protection

   A cash advance has no grace period and adds a fee. Some cards charge yearly fees, and some give rewards. Credit cards have stronger fraud protection than debit cards, because it’s the lender’s money until you pay.

Key words

statement balance

what you owe for the last billing cycle

APR

the yearly cost of borrowing, as a percent

Also called: annual percentage rate

grace period

the time before interest starts on purchases

cash advance

cash borrowed on a credit card, with a fee and no grace period

Common questions

Are card rewards worth it?

Rewards only come out ahead when the card is paid in full every month. Interest on a carried balance usually costs more than the rewards are worth.

Remember this

Pay the statement balance in full, every time.

Try it: Read a card’s key terms

1. Look up any credit card’s offer page online. Card companies must show a key-terms table.
2. Find the key-terms box: the purchase APR, the grace period and the fees.
3. Find the cash advance APR and fee, too.

The whole mission: no account or app needed.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• Credit card rules and your rights (CARD Act), including late fees

  Source: CFPB(opens in a new tab)