Credit
Learn how credit cards work and understand the basic concepts behind credit limits, balances, billing cycles, and payments.
A credit card is a financial account that allows you to borrow money up to an approved credit limit. When you use the card to make a purchase, the amount you spend becomes part of your balance.
As you make payments, the amount of credit available to you can increase again. This makes a credit card different from many traditional loans.
Credit cards generally use a type of credit called revolving credit. Instead of borrowing one fixed amount, you receive a credit limit that can be used repeatedly as long as the account remains open and in good standing.
For example, if your credit limit is $3,000 and you have a $500 balance, you would generally have $2,500 of available credit remaining. If you pay down the balance, more of that credit becomes available again.
Credit can be used, repaid, and generally becomes available to use again, up to the account's credit limit.
A fixed amount is borrowed and repaid over a set period of time through scheduled payments. Auto loans and many personal loans are common examples.
Understanding a credit card becomes much easier when you know the terms used to describe your account, balance, and payment schedule.
The maximum amount of credit the card issuer allows you to use on the account.
The amount of your credit limit that is currently available to use. It can change as you make purchases, payments, or other transactions.
The amount currently owed on the account based on transactions that have been posted. It can change throughout the billing cycle as purchases and payments are added to the account.
The amount shown as owed when your billing cycle ends and your statement is created. New transactions made after the statement closes are generally not included in that statement balance.
The minimum amount you must pay by the payment due date to satisfy the card issuer's payment requirement for that billing cycle. Paying only the minimum can leave part of the balance unpaid and may result in interest charges, depending on the account and balance.
The period of time covered by a credit card statement. Transactions during this period are used to create the statement at the end of the cycle.
The date a billing cycle ends and the card issuer prepares the account's statement for that period.
The date by which the required payment must be received by the card issuer.
A credit card account moves through a repeating billing cycle. Understanding this sequence makes it easier to see how purchases become part of a statement and when a payment becomes due.
Purchases and other transactions are added to your account during the billing cycle.
At the end of the cycle, the card issuer creates your statement.
The statement shows the balance for that billing cycle and other account information.
You must make at least the required minimum payment by the payment due date.
Your statement balance and current balance can be different because they represent your account at different points in time.
Represents the balance when your most recent billing cycle closed.
Represents the balance currently posted to your account and can include transactions and payments made after the previous statement closed.
Example
Suppose your statement closes with a balance of $600. A few days later, you make a new $100 purchase. Your statement balance can remain $600 while your current balance becomes $700.
When a payment is applied to your account, it generally reduces the amount you owe and can increase your available credit. However, the amount you choose to pay matters. Paying only the minimum payment can leave part of the balance unpaid, while paying more reduces the balance faster.
Important to know
A few additional concepts can affect how much a credit card ultimately costs.
Paying only the minimum can cause a balance to take much longer to repay and may result in more interest being paid over time.
Many credit cards provide a grace period for purchases. When a grace period applies and its conditions are met, paying the statement balance in full by the due date can allow you to avoid interest on those purchases. Carrying an unpaid balance may cause you to lose the grace period for new purchases.
Cash advances, balance transfers, and other types of transactions can have different fees, interest rates, or grace-period rules.
Key takeaway
A credit card is a form of revolving credit. You can borrow up to a credit limit, repay what you owe, and reuse available credit. Understanding your billing cycle, statement balance, current balance, and payment due date makes it easier to understand how your credit card account works.
Continue learning
Continue learning how interest can affect the cost of carrying a credit card balance.