What beginners need to know about credit cards

How do credit cards work?

On its face, a credit card is a piece of plastic that you can use to pay for things. If you're new to credit cards, however, it's important to understand not just what they are, but how they work.

When you make a credit card payment, you're paying that loan back. You can pay it off in full immediately or piecemeal over time. If you choose the latter, interest will accrue each month, such that your purchase becomes more expensive the longer you take to pay for it.

Credit card companies

Credit cards are issued by banks, credit unions, and credit card companies (or issuers) in conjunction with credit card payment networks. The issuer brands the card and provides the funds while the payment network facilitates transactions.

There are four major credit card networks:

The major credit card issuers include:

American Express is both a credit card network and credit card issuer. Where you can use your card will depend on the network (i.e., some merchants might not accept Discover). The credit card company will usually determine qualification requirements, rewards, interest rates and other fees.

Types of credit cards

Aside from being a convenient form of payment, credit cards frequently offer additional benefits. There are many different types of credit cards, depending on the benefits offered, including:

Travel

A travel rewards credit card is designed for frequent travelers, who can earn rewards when they use the card for travel expenditures and/or later redeem those rewards for travel-related perks, like free or discounted airline tickets and hotel rooms.

Cash back

A cashback credit card gives you a percentage of your purchases back to you in the form of cash rewards. Depending on the card, you might earn:

Although options vary by card, cardholders typically have a number of redemption choices, including cash rewards for travel, gift cards or merchandise; a deposit into a bank account; or credits against charges on your credit card statement.

Balance transfer

A balance transfer credit card is geared toward people who want to consolidate credit card debt for the purpose of paying it down. Balance transfer cards typically offer a 0% introductory APR for an extended period of time during which you can transfer balances from other cards and allow them to sit – interest-free – while you pay them off. If you don't pay them off, however, transferred balances begin accruing interest as soon as the introductory APR expires.

0% intro APR

When a credit card offers a 0% introductory APR, that means its issuer promises not to charge you interest on purchases and/or balance transfers for a limited time. During that time, you can carry a balance – i.e., defer paying your bill – with no penalty. This can be useful if you need to consolidate and pay down debt from other credit cards, or if you want to make a large purchase and pay for it over time instead of all at once.

Student

A student credit card is designed especially for college students to help them learn how to use and manage credit. Because students typically have no or little credit history and very low incomes, they tend to have higher interest rates and lower credit limits than regular credit cards, and may require a cosigner if the applicant doesn't have sufficient income – from a part-time job, for example – to meet the card issuer's requirements.

Building credit

Some credit cards are designed especially for people who need to build credit, including young people who are establishing credit for the first time and people who are seeking to rebuild their credit after previously damaging it. Such cards often are "secured" cards, which means they're backed by collateral in the form of a cash deposit. If you use credit responsibly for a period of time, the issuer eventually will return your deposit and allow you to graduate to an unsecured credit card.

Because they may be easier to obtain and often have more restricted uses, store credit cards – credit cards issued by a retailer for use only at their stores – also can be useful for building credit.

How to use a credit card

A credit card can be a valuable tool with which to build a strong financial future. Or, it can be a flamethrower with which to torch said future. The difference lies in how you use the credit cards that you have. Here are a few tips to help you wield your plastic responsibly:

1. Avoid getting too many cards

Applying for too many credit cards at once can hurt your credit score by making it look like you're having a hard time getting approved, or like you're amassing credit in order to make a big purchase you can't afford. Moreover, having multiple cards means having multiple balances to keep track of. If you limit yourself to just one or two cards, it will be easier to keep tabs on your spending and payments.

2. Use credit often, but sparingly

It's not enough to just have a credit card; if you want to establish a good credit history, you've also got to use it. Doing so shows lenders not only that you can qualify for credit, but that you know how to use it responsibly. You should therefore use your credit card regularly – at least a few times a month. Be careful, though: Credit utilization (i.e., the amount of available credit that you actually use) is a major factor in your credit score, and you should aim to keep it low. How low, exactly? Under 30% is a good rule. If you have a credit limit of $5,000, that means you should never have a credit card balance of more than $1,500 at any one time.

3. Pay your bill on time

Using a credit card is like taking out a loan. Every month, you've got to repay the loan by paying your bill. Your card issuer will give you a minimum amount that's due, and you must pay that amount by the due date; if you don't, your interest rate might go up and you may have to pay late fees, both of which can keep you from reaching your financial goals.

4. Avoid carrying a balance

Although you don't have to pay your balance in full every month, you should. If you don't, the remainder will accumulate interest, which will cost you money and create a debt hole that might be hard to climb out of. Imagine, for example, that your credit card interest rate is 18%, and that you owe $1,000. Your minimum monthly payment is $50. If you stop using the card and only pay the minimum, it will take you five years to pay off the balance, during which time you'll accrue $360 in interest. That means paying $1,360 for $1,000 worth of purchases. Now imagine that you owe more than $1,000, and that you continue using your card; it's easy to see how debt spirals begin.

How to choose the best credit card for you

Not all credit cards are created equal. To find the one that's best suited to your needs and goals, take the following steps:

1. Pull your credit score

Some credit cards are reserved only for applicants who have an excellent credit history, while others have more lenient requirements. In order to qualify, you'll need to have a credit score that meets that card's requirements. Credit card issuers use your credit score to determine your creditworthiness.

This is why it helps to know your credit score going into credit card applications, so you can narrow down your options to only those you have a good chance at qualifying for. Here are some ways to get your credit score for free:

The most common credit score is a FICO® Score, which is calculated using variables such as the length of your credit history, your track record for on-time payments and your credit utilization (i.e., how much of your available credit you use), among other things. FICO® Scores range as follows:

We suggest that you have good to excellent credit for your best chances at qualifying for a top credit card.

2. Evaluate your spending needs

You should choose a card that is suited to your spending habits and financial goals:

3. Decide what type of rewards you want

Assuming you can qualify for one, a rewards credit card is a great way to make money while you spend it. But rewards come in many different shapes, including miles, points and dollars.

4. Evaluate your spending patterns

Your personal spending habits should shape your search for a credit card.

Likewise, many credit cards come with attractive welcome bonuses that require you to spend a certain amount of money within a certain timeframe. If a welcome bonus mandates that you spend $5,000 in three months, but you typically only charge $1,000 per month, then it may not be worthwhile.

Still other cards charge hefty annual fees. If you spend enough money to accumulate sufficient rewards, the annual fee can pay for itself; but if you don't, the annual fee might prove beyond your reach.

5. Look at other credit card benefits

Like all businesses, credit card issuers compete for customers. Therefore, they often offer a slew of value-added benefits designed to sway you to do business with them instead of their competitors. Common benefits include:

Shop around – if you're going to get a new credit card, you might as well choose one with benefits that appeal to you.

How to compare credit card offers

Once you know what you're looking for in a credit card – what kind of card you want, for example, what rewards appeal to you and which benefits you want to avail yourself of – you can begin comparing cards to determine which ones offer the best value. Specifically, you should consider the following variables and use your yearly credit card spend as a barometer to gauge potential returns:

Earning rate

If you're comparing rewards cards, it's important to understand how many miles or points your spending can earn you with a given card, or how much cash back.

Redemption value

Earning rewards is one thing; redeeming them is another entirely. Often, rewards are worth 1 cent per point or mile. That can vary, however, according to the card and even according to redemption preference (e.g., for travel versus merchandise or gift cards). Calculating rewards value requires doing some research and some math.

Sign-up bonus

Many cards offer a welcome or sign-up bonus; a side-by-side comparison can help you determine which offers are the most lucrative.

Annual fee

Some of the best credit cards for rewards charge an annual fee. A higher fee, however, often translates to better rewards, in which case the price of admission might be worth it.

Net return

When you add up the value of a card's rewards and bonus and subtract the sum of its fees, you end up with a net return by which to perform an apples-to-apples comparison between cards.

Value of other benefits

Don't forget to consider cards' ancillary benefits, which can add significantly to their value proposition. If a card offers a $200 travel credit, for example, that's like having $200 in your pocket. And if your card offers car rental insurance, that means you can decline the rental company's expensive coverage when it's offered.

Here's an example comparison between two cards – the Citi® Double Cash Card – 18 month BT offer and Blue Cash Preferred® Card from American Express. As you can see, though the Blue Cash Preferred® Card from American Express charges a $0 introductory annual fee for the first year, then $95 annual fee, it can be a better value in the first year:

	Citi® Double Cash Card – 18 month BT offer	Blue Cash Preferred® Card from American Express
Earning rate	Earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases.	6% Cash Back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% Cash Back on select U.S. streaming subscriptions, 3% Cash Back at U.S. gas stations and on transit (including taxis/rideshare, parking, tolls, trains, buses and more), 1% Cash Back on other purchases. Terms apply.
Redemption value (e.g., on $5,000 in supermarket purchases and $15,000 in other purchases)	$20,000 x 2% = $400	$15,000 x 1% = $150 $5,000 x 6% = $300
Welcome offer	No bonus	$300 back after you spend $3,000 in purchases on your new Card within the first 6 months.
Annual fee	$0	$0 introductory annual fee for the first year, then $95. For rates and fees of the Blue Cash Preferred® Card from American Express, please click here.
Net return in first year	$400	$450
Other benefits	No other significant benefits	Car rental insurance Return protection Purchase protection ShopRunner membership (enrollment required)
	Apply Now On Citibank's Secure Website	Apply Now See Rates & Fees. Terms Apply. On American Express' Secure Website

What is a good APR for a credit card?

APR stands for "Annual Percentage Rate." Essentially, it's the amount of interest you are charged per year for carrying a balance on your credit card. Credit card issuers determine APR based on your creditworthiness; the better your credit, the better your APR. With that in mind, the best APR is the lowest. The following chart can help you gauge whether your APR is low, high or typical for the type of card you have:

How to apply for a credit card and get approved

Once you've decided what kind of credit card you want, it's time to set about getting it. Here's how:

Find a card that matches your credit score range

When you're applying for a credit card, you can set yourself up for success by pursuing a card that complements your credit score. Here are our top picks for each credit score range:

Make sure your credit application is complete

When an issuer is deciding whether to grant you a credit card, your credit score is a big factor. But it's not the only factor. Typically, credit card applications also ask you to supply information about your debts and income. Although you shouldn't overstate your income or understate your debt, you can improve your chances of being approved by making sure the information on your application is accurate, comprehensive and complete. If you earn income outside of your primary employment, for example – from a side gig, perhaps – be sure to include it. Likewise, include income from your partner or spouse; if you're 21 or over, credit card issuers are allowed to consider overall household income as part of your application.

Don't apply for too many cards at once

Be judicious about applying for credit cards. When you apply for a card, the issuer checks your credit history, which creates what's known as a "hard inquiry" on your credit report. If you apply for too many cards at one time, it will create multiple hard inquiries, which can have a negative impact on your credit report by suggesting either that your applications for credit are being denied or that you're preparing to take on a large amount of debt that you might be unable to repay.

Check for prequalified offers

If you apply for credit cards whose requirements are beyond your reach, you can end up shooting yourself in the foot. Not only will your application be denied, but you'll also generate a hard inquiry on your credit report, which can lower your credit score to the detriment of the next application you submit. You can reduce the risk by embracing prequalified offers. Such offers often arrive by mail, but you can also check for them online via bank and issuer websites.

Simply enter your information and the issuer will conduct a "soft inquiry" on your credit report that does not impact your credit score; the issuer will then present you with a list of prequalified offers based on your creditworthiness. Prequalification is not a guarantee that your application will be approved, but it's a good indicator that you might be.

Try applying through your bank

You can apply for a credit card by mail, online or over the phone. You also can apply in person at your bank. If you have a poor or limited credit history, that might be the way to go – especially if you have a good relationship with your banker, in which case they might be willing to personally shepherd your application through the review process and advocate internally for its approval.

FAQs about credit cards

Recap of the best credit cards for 2022

Methodology

To make choosing the right card easier, we've looked at credit cards reviewed on ValuePenguin as well as cards on major issuer sites to compile a list of the best rewards credit cards available right now. Our recommendations are based on the additional value you can earn with the cards — including the rewards value, cost of ownership and value of benefits such as travel and purchase protections, lounge membership and airline companion passes. Our choices are not influenced by our advertisers. Learn more on how we calculate rewards.