What is a credit card
A credit card is a revolving line of credit with a set limit. You borrow as you spend, and as you repay, the credit becomes available again. There is no fixed repayment schedule: each month you must pay at least the minimum payment.
Key terms
- Credit limit — the maximum balance. Issuers can raise or lower it.
- Grace period — if you pay the statement balance in full by the due date, new purchases accrue no interest. By law the statement must arrive at least 21 days before the due date.
- APR — almost always variable: the Prime Rate plus a margin. There are usually separate APRs for purchases, balance transfers and cash advances, plus a penalty APR.
- Minimum payment — often 1% of the balance plus interest and fees, or a percentage of the balance, with a floor such as $25–$40.
- Credit utilization — the share of your limits you use; keeping it low helps your credit score.
How the grace period and interest work
Most US cards calculate interest on the average daily balance. If you pay the full statement balance every month, you pay no interest on purchases. If you carry a balance, you typically lose the grace period: new purchases start accruing interest immediately until you pay in full again.
Watch for residual (trailing) interest: after you pay off a carried balance, the next statement can still show interest that accrued between the statement date and your payment. Pay the next statement in full too.
Under the CARD Act, double-cycle billing is banned, and payments above the minimum must go to the balance with the highest APR first.
Fees to watch
- Annual fee — $0 on many cards, several hundred dollars on premium travel cards.
- Cash advances — usually a fee of 3–5% (with a minimum), a higher APR, and no grace period; interest starts the same day.
- Cash-like transactions — buying money orders, gambling, some peer-to-peer and crypto purchases may be treated as cash advances.
- Balance transfer fee — typically 3–5% of the amount transferred.
- Late fees — limited by federal safe-harbor amounts (the CFPB’s proposed $8 cap was vacated in 2025). Being 60+ days late can trigger the penalty APR.
- Foreign transaction fees — often around 3% on purchases abroad or in foreign currencies; many travel cards charge none.
Your rights under the CARD Act
- Issuers can’t raise the APR on a new account during the first year (except for variable rates, promotions ending or 60+ days late).
- 45 days’ advance notice is required for rate increases and significant changes; you can usually reject them by closing the account and paying it off under the old terms.
- Over-limit fees are allowed only if you opt in.
- Applicants under 21 must show independent income or have a co-signer.
How terms differ between issuers
| Term | How it can differ |
|---|---|
| Purchase APR | Margin over Prime by credit tier; separate cash and penalty APRs. |
| Intro offers | 0% on purchases or balance transfers for up to roughly 12–21 months, with or without a transfer fee. |
| Rewards | Flat cashback vs. bonus categories, caps, points value, sign-up bonuses. |
| Annual fee | None, waived the first year, or high with travel credits and perks. |
| Minimum payment formula | 1% plus interest vs. a flat percentage; minimum dollar floor. |
| Foreign fees | None or around 3%. |
The minimum payment trap
If you only make minimum payments, the debt shrinks very slowly. Example: a $5,000 balance at 24% APR with a minimum of 1% of the balance plus interest (at least $25) takes about 19½ years to repay and costs about $8,900 in interest. Paying $200 a month instead clears it in 3 years with about $2,000 of interest. Your statement must show how long minimum payments would take and the payment needed to pay off the balance in 3 years.
Enter your card balance and APR into SMARTPRO to see how many months it will take to repay at different monthly payments and how much interest you will pay.
How to use a card wisely
- Pay the statement balance in full every month and set up autopay for at least the minimum.
- Avoid cash advances.
- Use a 0% balance transfer only with a plan to pay the debt off before the promotion ends.
- Check your credit reports for free at AnnualCreditReport.com, and consider a credit freeze to block fraudulent new accounts.
This material is for general information only, describes US rules in effect on the publication date, and is not financial, legal or tax advice. Federal and state rules, programs and lender terms change — always check your loan documents, your lender’s current terms and official sources such as the CFPB and IRS.