Credit Cards
Credit cards are one of the most useful financial tools — and one of the most dangerous. Understanding how they actually work is the difference between building credit and drowning in debt.
How Credit Cards Work
When you swipe a credit card, you are borrowing money from the bank. The bank pays the store, and you owe the bank. At the end of each month, you get a bill.
You owe nothing in interest. The bank makes money from merchants, not from you. You get free short-term borrowing, fraud protection, and often rewards.
Interest charges kick in — usually 20-30% APR. That $100 purchase can quickly become $120 or $150. This is how credit card companies make most of their money.
The Minimum Payment Trap
This is where people get stuck
Your credit card bill shows a "minimum payment" — usually $25-35 or 1-3% of your balance. This is the smallest amount you can pay without being "late."
But here is the trap: if you only pay the minimum, most of your payment goes to interest, not your actual debt.
Example:
$3,000 balance at 20% APR, paying minimum only:
- Time to pay off: 9+ years
- Total paid: $5,000+
- Interest alone: $2,000+
Key Terms You Need to Know
APR (Annual Percentage Rate)
The yearly interest rate. A 24% APR means roughly 2% per month on your balance. Credit card APRs are among the highest of any loan type.
Credit Limit
The maximum you can borrow. Going over it can result in fees and declined transactions. Using too much of it hurts your credit score.
Grace Period
The time between your purchase and when interest starts (usually 21-25 days). Pay in full by the due date and you pay no interest at all.
Credit Utilization
The percentage of your limit you are using. Using $3,000 of a $10,000 limit = 30% utilization. Under 30% is good; under 10% is better for your credit score.
Rules for Using Credit Cards Wisely
Pay your full balance every month — this is non-negotiable for financial health
Never buy something on credit you could not pay for in cash right now
Set up autopay for at least the minimum payment to never miss a due date
Keep utilization under 30% (ideally under 10%) of your credit limit
Check your statements monthly for fraud or errors
Avoid cash advances — they charge interest immediately with no grace period
When Credit Cards Make Sense
- Building credit history (pay in full)
- Fraud protection for online purchases
- Earning rewards on spending you would do anyway
- Travel and rental car protections
- Tracking spending (everything in one statement)
- Buying things you cannot afford
- Carrying a balance month to month
- Cash advances
- Chasing rewards while carrying debt
- Using when you have impulse control issues
Key Takeaway
Credit cards are only a good deal if you pay in full every month. The moment you carry a balance, you are paying 20%+ interest on everything — far more than any rewards you earn. Treat your credit card like a debit card: never charge more than you have in the bank.