Finance
How does a credit card work?
A credit card lets you borrow money from a bank, up to a limit, to pay for things and repay later. The bank pays the merchant instantly; you repay the bank — interest-free if you clear the balance by the due date, with interest if you don't.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how a credit card works.
Step by step
- 1The bank extends a revolving credit line up to a set limit.
- 2Each purchase is a short-term loan the bank pays the merchant for.
- 3Pay the full balance by the due date → no interest.
- 4Carry a balance → high compound interest accrues.
Frequently asked questions
- How does a credit card work?
- You borrow from the bank for purchases up to a limit and repay later; clearing the full balance on time avoids interest.
- What is APR?
- Annual Percentage Rate — the yearly interest charged on balances you don't pay off.
- How is a credit card different from a debit card?
- A debit card spends your own money instantly; a credit card borrows the bank's money to repay later.