How Do Credit Cards Work? Are They Worth It?

Credit cards are a dominant form of payment, but how do they work exactly? Based on the enormous debt piled up on credit cards, many users don't seem to know the answer to that question.

Credit cards are one of the most popular forms of payment for goods and services. The thin rectangular piece of plastic or metal serves as a payment option for buyers to borrow funds for purchases today and pay them back later.

What is a Credit Card?

How do Credit Cards Work?

Credit cards allow users to make purchases and pay bills. First, a buyer gives the credit card to a merchant, who electronically contacts your credit card issuer to authorize the transaction based upon the credit card terms. Then the bank (credit card issuer in most cases) applies the transaction to your credit card balance.

How do Credit Card Companies Make Money?

The credit card issuer makes money by charging you interest for loaning you money. There is a 21-day grace period where no interest is charged. If you don't pay the debt back by then, you will incur interest fees.

Who Needs a Credit Card?

Nobody “needs” a credit card. It should only be used by those that have the means to pay the bill on time. If you try using credit cards without a solid financial plan and payment history, you could waste tens of thousands of dollars over a lifetime.