Nearly 20% of global consumers own at least one credit card. A credit card is a tightly structured financial system centered on time management. It separates the moment a purchase is made from the moment cash leaves your account.

Below, we explain what a credit card is, how credit card payments work, and how costs show up over time.

What’s in this article?

• What is a credit card?
  
• How does a credit card work?
  
• What are credit cards commonly used for?
  
• How do interest charges on credit cards work?
  
• What is a credit limit, and how is it determined?
  
• What fees can credit cards charge?
  
• How Stripe Payments can help
  

What is a credit card?

A credit card is a payment tool that lets you spend money you might not have yet with the expectation that you’ll pay it back later. It’s an agreement in which an issuer agrees to front payments on your behalf within a defined limit. The card issuer covers the cost of the purchase upfront and records the amount as a balance on your account, which you repay on a set schedule.

How does a credit card work?

The issuer assigns you a credit limit. Each purchase you make reduces your available credit, and each payment you make restores it.

Using your card to make a purchase in person or online gives the issuer approval to pay the business for that amount. The business sends the charge through a payment processor and card network to your issuing bank, which verifies the account and available credit. If the account is in good standing and the charge fits within your credit limit, the issuer approves it and reduces your available credit by that amount.

Once approved, the business receives the funds through its acquiring bank, usually within a few business days. The transaction appears on your account and increases your outstanding balance.

All charges, refunds, payments, and fees within a set period roll into a monthly billing cycle. At the end of the cycle, the issuer provides a statement showing the statement balance, minimum payment, and due date. If you see a charge you didn’t authorize, you can dispute it. Charges made after the statement closing date aren’t due until the following cycle, even if you haven’t paid the prior balance yet.

Payment is typically due several weeks after the statement closes, which gives you time to review and pay. When and how much you pay can affect interest charges. Making payments on time can make a substantial difference in keeping your debt down if you’re carrying a higher balance. Some cardholders use scheduled or automatic payments to make sure they meet due dates without constant monitoring.

What are credit cards commonly used for?

Credit cards are often used when spending needs to be fast, traceable, and flexible.

Here’s how they’re commonly used:

• Everyday purchases: Credit cards are widely swiped, inserted, or tapped for routine expenses for which speed and acceptance matter, such as food, fuel, and services.

• Online payments: Ecommerce and digital services rely heavily on card payments because they’re easy to authorize and used globally.

• Recurring charges: Utilities, subscriptions, and contract-based services are often billed automatically to credit cards to reduce missed payments and overhead.

• Travel and lodging: Cards are commonly required for booking flights, hotels, and rental cars, and are used to cover incidental charges during travel.

• Business expenses: Companies generally use credit cards for operating costs such as software, marketing, travel, and supplies; they often centralize spending for visibility and control.

• Short-term cash flow gaps: Credit cards can ease timing differences between expenses and incoming revenue, especially for smaller businesses managing irregular cash flow.

• Large or unexpected expenses: Cards provide immediate access to funds for high-cost purchases or urgent needs, with repayment spread across billing cycles if necessary.

• Expense tracking and reporting: Credit card statements provide a built-in transaction record that simplifies reconciliation, budgeting, and audits.

• Fraud protection and dispute resolution: Cards provide structured processes for disputing unauthorized or incorrect charges, which reduces financial risk for the cardholder.

• Building and maintaining credit history: Regular, responsible use contributes to a credit profile that supports future borrowing and financing options.

How do interest charges on credit cards work?

Interest is the cost of carrying a balance past the payment deadline. Here are the ways it affects cardholders.

Annual percentage rate

The annual percentage rate (APR) represents the yearly cost of borrowing and must be disclosed to customers. Different rates often apply to purchases, cash advances, and balance transfers. Issuers typically divide the APR by 365 to get a daily rate, then apply it to your balance each day it remains unpaid.

Grace periods

If you pay your full statement balance by the due date, issuers usually don’t charge interest on purchases made during that billing cycle. If you don’t pay the full statement balance, interest begins to accrue on the remaining amount, often immediately after the due date.

Compound interest

Each day’s interest becomes part of the balance, which means future interest is calculated on both the original charges and prior interest. Some transactions accrue interest differently. For example, cash advances typically accrue interest right away, with no grace period, and often at a higher interest rate than purchases.

Interest reductions

Some cards offer low or zero interest for a set period, but any remaining balance starts accruing interest once the promotion ends. Paying down balances sooner (e.g., midcycle) can also lower the total interest charged.

Interest hikes

Missing or late payments can lead to a penalty APR, often higher than regular APRs. This can substantially increase the cost of carrying a balance.

Strategic interest payments

Issuers typically apply payments above the minimum to the balances with the highest interest rate first. This is required in many jurisdictions.

What is a credit limit, and how is it determined?

A credit limit is the maximum outstanding balance allowed. It’s the total amount you can borrow. Issuers evaluate credit history, repayment behavior, income, existing debt, and overall risk when deciding how much credit to extend. Cardholders with a history of consistent on-time payments, low existing debt, and stable income tend to hold larger credit lines. Those with new or limited credit histories often start with lower limits, which gives them the chance to demonstrate responsible use.

Credit limits can differ depending on whether the card is for personal or business use. Issuers consider company revenue, cash flow, time in operation, and, in some cases, the owner’s personal credit when evaluating business card applications.

Issuers might increase limits after sustained responsible use or reduce them if risk increases, but requesting a higher limit often leads to a fresh review of credit data and financial capacity. Regularly using a large share of your limit can restrict spending room and might negatively affect credit scores. Many cards decline transactions that would push the balance over the limit, though some accounts allow limited overages under specific terms.

What fees can credit cards charge?

Credit cards can charge several fees, and some are avoidable.

Here are some of the common fees you’ll encounter with credit cards:

• Annual fees: Some cards charge an annual fee, typically for access to rewards, benefits, or higher service levels, while many standard cards have no annual fee.

• Late payment fees: Missing the payment due date typically results in a flat fee and can also trigger higher interest rates.

• Returned payment fees: Payments that fail due to insufficient funds can incur a penalty.

• Cash advance fees: Using a credit card to withdraw cash usually comes with an up-front fee and immediate higher interest rates.

• Balance transfer fees: Moving a balance from one card to another often costs a percentage of the amount transferred.

• Foreign transaction fees: Purchases processed in another currency or through foreign banks might include an additional percentage-based charge.

• Authorized user fees: Some cards charge a fee to add extra cardholders, especially on premium or corporate accounts.

• Over-limit fees: In limited cases where overages are allowed, you can exceed the credit limit for a fee.

• Expedited or replacement card fees: Rush shipping or specialty replacements might carry small administrative charges.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business accept digital wallet payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 100+ payment methods, including more than a dozen digital wallet payment methods, and Link, a wallet built by Stripe.

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• Unify payments in person and online: Easily track and reconcile digital wallet payments across online and in-person channels.

• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.