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Credit cards can be a powerful financial tool or a slippery slope into debt — all depending on how they’re used. This guide can help you brush up on a few key facts and learn how to reap the benefits.

Ready? Let’s dive right in.

How Do Credit Cards Work?

Credit generally falls into one of two categories: revolving or installment. Installment credit includes mortgages and auto loans — they have a balance that is paid off in set increments (or installments) until the balance reaches zero. Most credit cards, on the other hand, are considered revolving — they come with a set credit limit that can be accessed repeatedly, as long as at least the minimum payment is made each month, and charges do not exceed the credit limit. 

[Learn more about revolving accounts.]

Here are a few more facts about credit cards you might not know.

There are many different types of credit cards. 

Think all credit cards are essentially the same? Not so fast. Many credit cards are designed for a specific purpose — like earning rewards or transferring a balance — and many credit cards serve specific groups of people — like students or business owners. 

Your credit will usually determine your credit limit and APR. 

Most credit card issuers require a credit check to determine your APR (annual percentage rate), credit limit, and overall eligibility. Generally, the lower your score the higher the APR and lower the credit limit.  

Your credit limit can change. 

An initial credit limit can change over time, often because the credit card company offers an increase or you request one.

[Find out how credit limits work.]

You can avoid interest charges. 

While paying interest on a loan is usually a given, that’s not necessarily the case with credit cards. That’s because most credit cards have a grace period in which interest does not yet begin to accrue. If you pay off your balance in full before this period ends, you should not be charged interest (this may not apply to cash advances and balance transfers).

[Get more facts about how credit cards work.]

How to Get a Credit Card

Depending on your financial situation, getting a credit card can be easy. But getting the right credit card for you means taking a few important steps.

  1. Take stock of your current financial situation.
    If you’re struggling financially as it is, now may not be the best time to consider opening a credit card. In fact, it could add to your debt and make it harder to regain your financial footing in the long run.
  2. Review your credit report and dispute any errors.
    Ready to move forward? Get a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) at and start the process of disputing any errors you find.
    [Learn more about disputing credit report errors and find out how Upturn can help for FREE.]
  3. Get a general idea of where your credit score stands.
    Your credit score can greatly impact the credit card you are approved for, so in addition to reviewing your credit report, check your credit score to see what your options might be. Note: The credit report you receive from each of the three credit reporting agencies does not show your credit score.
    [Find out where you can check your credit score for free.]
  4. Research your options.
    There are a variety of credit cards available with different approval requirements, fee structures, and benefits. Decide what is important to you and research what you could possibly get approved for. 
  5. Get all the facts.
    Credit cards come with a substantial amount of fine print which can greatly impact how much you’re charged and when. Here are a few things to look for:

    • APR (This could be different for regular purchases, balance transfers, and cash advances. Make sure to check all 3.)
    • Late payment fees and penalty APR 
    • Other fees like balance transfer, cash advance, foreign transaction and annual fees.
  6. Apply.
    Once you’ve decided on the card that’s right for you, it’s time to apply. One important thing to note: Applying for a credit card generally results in a hard inquiry on your credit report. In order to lessen the impact to your credit score, it’s important to keep your applications to a minimum and within a short period of time.
  7. Follow credit card best practices.
    We’ve compiled a few of the top recommendations below. 

What’s APR? 

APR can vary drastically from card to card and applicant to applicant. But what is it exactly?

APR is your interest rate stated as a yearly rate and can either be fixed or variable. If it’s variable, the rate is partly based on where a certain index currently sits (usually the U.S. Prime Rate). Fixed rates don’t change with index fluctuations but can change for other reasons — if you are 60-plus days late on a payment, for instance.

Depending on the credit card, you could also see a Daily Periodic Rate (DPR). This is the daily rate you are charged for purchases made (outside the grace period, if there is one). You can determine this rate by dividing your APR by either 365 or 360 (depending on the card). 

[Get the full story on how APR is calculated.]

Grace Periods

The most cost effective way to use an interest bearing credit card is to avoid interest charges by paying off your balance during each month’s grace period (if your card has one). This is the period of time between when your billing cycle closes and when your payment is due — generally 21 days. If you carry a balance forward into the next billing cycle, you will be charged interest on the remaining balance AND on any new charges you make. This continues until you pay your balance off in full, restarting your card’s grace period.  

Types of Credit Cards

Just like any financial product, credit cards are not one-size-fits-all. Finding the right credit card for you might require exploring a few different options.

Rewards Credit Cards

Rewards credit cards offer certain benefits for purchases made, like cash back or points redeemable for travel. 

Balance Transfer Credit Cards

Credit card issuers may offer a promotional offer of low or no interest for balances transferred from another card. While this is generally just an introductory offer with a set time limit and balance transfer amount, it can help pay down debt faster than a credit card with a high interest rate or other fees.

[Find out how balance transfer credit cards work.]

Retail Credit Cards 

If you’ve ever shopped at a store with a retail credit card, you’ve likely been enticed into signing up in exchange for a discount on items purchased. These credit cards are typically still offered by a bank but sponsored by the retailer.

[Get the facts on other types of credit cards.]

Credit Cards and Bad Credit

Bad credit doesn’t necessarily make it impossible to get a credit card. If you’re in this category, there are generally two options. 

Secured Credit Cards

Secured credit cards generally require a security deposit and offer a credit limit equal to that amount. Similar to a security deposit for an apartment, these funds cannot be used to pay the balance and are usually returned once the card is closed or converted to a regular credit card. For those with bad or no credit, this can be a helpful first step to establishing good credit card habits and possibly getting approved for a traditional credit card.

[Learn more about secured credit cards.]

Unsecured Credit Cards for Bad Credit

Getting a traditional, unsecured credit card with bad credit isn’t impossible, but it will likely come with a few drawbacks — like a low credit limit, high interest rates, and/or high fees. 

Here are a few questions to ask:

  • Does this card come with an annual fee?
  • Does this card come with automatic account reviews that can lead to an upgrade to a traditional credit card?
  • How much is this card’s late fee, and does it charge a penalty APR for late payments?
  • What other fees does this card come with?

[Read more about getting a credit card with bad credit and some things to consider when choosing a card.]

Best Credit Cards 

From cash back to travel credits, there are plenty of credit cards with impressive perks and above average benefits. Here are a few of the best we’ve seen for 2020.

Best Overall: American Express Gold Card

  • Credit required: Good to excellent (670-850)
  • Annual Fee: $250
  • Bonus: 35,000 points when you spend $4,000 within the first 3 months
  • Rewards: Earn 4x points on restaurants, 4x at grocery stores (up to $25,000 per year), 3x points on flights booked through airlines or, $10 credit per month on Grubhub and more, $100 airline fee credit annually 

Best for Travel: Chase Sapphire Preferred 

  • Credit required: Good to excellent (670-850)
  • Annual Fee: $95
  • Bonus: 60,000 points when you spend $4,000 within the first 3 months (worth $750 towards travel if redeemed through Chases’ travel portal)
  • Rewards: Earn 2x points on travel and dining and 1x points on everything else 

Best for Cash Back: Discover it Cash Back 

  • Credit required: Good to excellent (670-850)
  • Annual Fee: $0
  • Bonus: All cash back earned in the first year will be matched 
  • Rewards: Earn 5% cash back on quarterly rotating categories, up to the set maximum, and 1% on all other purchases (no limit)  

Credit Cards and Debt

According to data collected by ValuePenguin and LendingTree, as of March 2020, credit card debt is a reality for a large number of American households. Check out the stats:

  • American households that have credit card debt: 41.2% 
  • Average balance for those who do carry credit card debt: $9,333
  • State with the highest average balance: Alaska with $13,048
  • State with the lowest average balance: Ohio with $5,446
  • Age bracket with the highest average balance: 45-54 with $9,096
  • Age bracket with the lowest average balance: 75+ with $5,638

How to Pay Off Credit Card Debt

Do you have credit card debt you’d like to get rid of? There are a few options to help. 

Consolidate Your Debt

While consolidating isn’t the end solution to getting rid of debt (after all, you’re just putting the debt into another form), it can help lessen the burden of accumulating interest and fees. There are generally two ways to do this: 

  • A loan
    Debt can be consolidated through a personal loan, retirement account loan, or a loan tied to collateral — either a cash-out auto refinance or a home equity loan. Once the credit card is paid off using the funds from this loan, you typically have predictable monthly payments and a debt payoff date.
    [Learn more about the pros and cons of paying off debt with a personal loan.]
  • Balance transfer credit card
    As mentioned before, balance transfer credit cards often come with an introductory offer of low to no interest. This can make it less expensive to take care of your debt, but beware — after this introductory offer is up, you could be charged a much higher rate on the remaining balance.

[Get the facts about debt consolidation.]

Pick a Debt Payoff Method 

Gain momentum and increase motivation for paying off credit card debt with one of these two payoff methods. 

  • Snowball
    List your credit cards out by balance, with the smallest balance first. Determine the minimum payment for each card, as well as your overall budget for debt payments. Pay the minimum on every card and any extra money put towards the card with the lowest balance. Once that card is paid in full, roll that extra money into the card with the next lowest payment and so on. 
  • Avalanche
    The avalanche method is the same general idea as the snowball method, but instead of putting extra money towards the card with the lowest balance, you put the extra money towards the card with the highest interest rate. 

While the snowball method can offer extra motivation by delivering “wins” faster, the avalanche method can potentially save more money by getting rid of high interest debt faster.

Credit Card Best Practices 

It’s entirely possible to leverage credit cards to improve your credit—if you follow a few important tips.

Pay more than the minimum payment. 

If you’ve ever looked at a credit card bill before, you’ve likely noticed the total balance and the minimum payment due are not the same. That’s because most credit cards only require payment on a small percentage of your total balance (or a set dollar amount) in order to keep your account in good standing. But depending on the size of your balance and how much you continue to charge, paying just the minimum could keep you in a perpetual state of debt.

Use a credit card interest calculator to see how long it would take and how much interest could accrue by only making the minimum payment.

Maintain a low credit utilization.

Credit utilization — the amount you have outstanding at a given point in time vs. the amount of credit you have available to you — plays a significant role in your credit score. The general rule of thumb is to keep this number no higher than 30%. 

[Learn more about credit utilization and how to calculate yours.]

Consider keeping your account(s) open.

Closing a credit card — even if you aren’t using it — can have a negative impact on your credit score. That’s because closing a credit card means that amount of credit is no longer available to you, potentially making your credit utilization increase. Also, it could decrease the average length of your credit history — another factor that impacts your score. 

[Find out what you should consider before closing a credit card.]

Make all payments on time.

Payment history is also considered highly influential in determining your credit score, so making consistent, on-time payments is key.

[Learn how credit cards can affect your credit and get more tips on how to handle credit cards responsibly.]

How to Cancel a Credit Card

While closing a credit card can negatively impact your credit, there are circumstances that might make this your best option. For instance, it could be a good idea if:  

  • the card isn’t being used and comes with an annual fee. 
  • you are having a hard time controlling your spending.
  • the card has a joint user with whom your relationship has changed (e.g. an ex-spouse).

When it comes to closing a credit card, try to steer clear of: 

  • closing your oldest account. This could lower the average age of your credit.
  • allowing a creditor to close an account based on inactivity. Instead, try to proactively close the account or use it for a small purchase to keep it active.
  • close an account with a large outstanding balance, which could negatively impact your credit utilization ratio. Consider paying down the balance first, or transferring it to another card.
    [Learn more about credit utilization.]

Once you’ve decided to close a credit card, following these steps can help.

  1. Consider what you’re going to do with your balance (if there is one).
    Once the balance is at zero (because you paid it off or transferred it to another card), move to step two.
  2. Redeem any rewards.
    Most card issuers will void any rewards you have once an account is closed.
  3. Speak to the credit card issuer.
    If you are closing the account due to a high annual fee, see if they will waive it. Otherwise, let them know you are interested in closing the account.
  4. Confirm the card is closed.
    Get your credit report from each of the three credit reporting agencies (Experian, Equifax, and TransUnion) at Make sure the account says “closed at customer request.”
  5. Safely dispose of the card.
    If you have a plastic card, shred or cut it up. If you have a metal card, send it back to the issuer. (They should provide a pre-addressed envelope.)

The Bottom Line

When used with caution and care, credit cards can be a beneficial financial tool. With a little due diligence to find the right card for your situation, and responsible usage, you can reap all the benefits and avoid the potential pitfalls.

[Find out how Upturn can help you dispute credit report errors and take control of your credit – for FREE.]