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What is a credit card?

Learn about the pros and cons of credit cards, how to apply for one and other responsible tips and tricks.

Gregory Andersen

Managing Editor at Tally

August 23, 2019

A credit card is a thin, rectangular piece of plastic or metal that you can use to buy things on credit, instead of using cash. When you make a purchase with a credit card, the money is loaned to you for the purchase with the understanding that you’ll repay the amount you borrow. 

A credit card lets you borrow money against a line of credit, which has a limit. Your credit limit is the maximum amount of money you’re able to borrow at any given time. As you repay what you borrow, money is continually made available on your line of credit.

Credit cards are typically issued by banks and financial institutions. The two most common types are unsecured and secured:

Unsecured credit card

An unsecured credit card is the most common type of credit card. It doesn’t require money to be opened. You typically need to have an existing credit history, a fair credit score and regular income to qualify. If you’re approved, the bank sets a spending limit for you. 

Secured credit card

A secured credit card requires money to be opened. You deposit money into an account, and the amount you deposit is your spending limit. Think of it like a debit card that helps you build your credit.

Learn more about credit card types in: How Do Credit Cards Work?

Should you apply for a credit card?

Figuring out if you should apply for a credit card requires some self-awareness about your money habits and financial tendencies. Being self-aware can help lead to better decisions. Here are a few questions to ask yourself:

  • Why do I want a credit card?

  • How do I plan on using a credit card?

  • Can I make due without a credit card? 

  • Will I always be able to make my monthly payments on time?

  • Do I plan on paying my full credit card balance each month?

  • Can build my credit without a credit card?

  • Do I trust myself not to overspend?

  • Will I be tempted to buy things I can’t afford? 

Here are some other things to consider before making your decision:

  • If you tend to reach the end of the month and find that you don’t have enough cash to pay for necessities due to overspending, think carefully before applying for a credit card. Overspending is a common reason people cite for being in credit card debt.

  • If you find yourself wondering where all your cash went because you don’t track your spending and hate budgets, think carefully before applying for a credit card. Budgeting is an important key to staying out of credit card debt.

  • If you often lose or misplace important items, think carefully before applying for a credit card. Theft and fraud are common occurrences, and losing or misplacing a credit card can lead to both, which can cause you stress, anxiety and lost time.

  • If you don’t have significant savings for sudden emergencies, think carefully before applying for a credit card. Little or no savings could land you in a situation where you rely on your credit card for extended periods and end up paying interest charges.

  • If you spend a lot of money on things you want versus things you need, think carefully before applying for a credit card. This may only get worse once you have the ability to buy now and pay later, potentially plunging you in debt.

Think of some other things to consider that are specific to your lifestyle before applying for a credit card. Preparing for every imaginable situation can help you make a better long-term decision. 

What are the pros of credit cards?

When used responsibly, credit cards offer a lot of upside — financially, organizationally and emotionally:


Most credit cards have rewards programs that let you earn points, rack up discounts, earn travel miles and get cash back on everyday purchases.


Having a credit card handy means you don’t have to carry cash, which can be easily stolen or lost. Retailers and merchants around the world accept credit cards, making them flexible for in-store and online purchases.


Credit cards automatically track your spending, so you know where you money goes and you can get alerts you when your information is stolen.  

Cover unexpected costs

A credit card can be a life-saver when you’re hit with an unexpected cost. Car repairs, doctor’s visits, pharmacy prescriptions and groceries are just a few of the situations where a credit card can be a quick and easy fix. 

Build credit history

If you use a credit card responsibly, it can be a great tool for improving your credit score and building your credit history. An excellent credit profile can grant you access to better interest rates and perks, which can save you money in the long run. 

What are the cons of credit cards?

Credit cards also have drawbacks. The convenience and benefits must be navigated in a responsible way:


The convenience of a credit card also makes it easy to overspend. Be careful not to spend more money than you have. Planning and restraint go a long way to curb overspending. 

Interest and fees

If you don’t pay off your balance in full each month, you’ll be charged interest on the remaining balance. You’ll also be charged a fee for making a late payment or exceeding your credit limit, both of which can put you deeper in debt.


Credit cards transmit a lot of sensitive data every time they’re used. The cards are also vulnerable to theft and fraud — personal information can be stolen and account numbers can be copied. 

Mounting debt

Carrying a balance is a common pitfall of using a credit card. Monthly interest charges and other fees can compound fast, making the amount you owe far more than what you originally borrowed.

Get to know your credit card

Every credit card features some version of the following information:

This is the logo of the bank, retailer or financial institution that approved you for a line of credit, which is not to be confused with a payment network provider (below). Examples include: Chase, Wells Fargo, Target and Macy’s.

Payment network

This is the network that facilitates the transaction between your bank and the seller you’re paying, which is not to be confused with your issuing bank (above.) Examples include: Visa, Mastercard, AMEX and Discover.

Expiration date

This is the date your credit card expires and must be reissued. Companies do this to protect against fraud and replace worn cards.

Card holder name

This is the name of the person to whom the card was issued. It might be your name or the name of someone else who’s authorized to use your account.

Card number

This is the number that’s assigned to your account and identifies you. It’s usually 16 digits and can be found on your physical card, monthly statement or online account.

Magnetic stripe

This is the metallic strip on the back of your credit card that encodes your personal data and account information. When you make a purchase, you may swipe your card, which transmits your information for transaction approval.

EMV chip

This is the small computer chip on your credit card that encodes your personal data and account information, just like the magnetic stripe (above). The EMV chip — which stands for Europay, MasterCard and Visa — is growing in popularity due to its improved protections against fraud. 

Card Verification Value (CVV) number

This is the 3-digit number on the back of your card. (American Express cards have a 4-digit CVV number on the front.) The CVV number is never stored by merchants, which means it’s an added layer of security for your personal data.

Bank contact information

This is the telephone number and/or website of your financial institution for support-related questions and fraud-prevention purposes.

How to use a credit card responsibly

Responsible credit card use is different for everyone, but there are some general rules that apply to most people:

Pay on-time each month

Avoid making late payments to your credit card company. Late payments are reported to the credit bureaus, hurt your credit score and stay on your credit report for seven years. Not to mention, late fees and interest charges will be added to your credit card balance. 

Pay more than the minimum

Credit card companies are required to tell you how long it will take to pay off your balance and how much money you will end up paying in interest if you only make your minimum payment. If possible, aim to pay off your full balance each month.

Minimize your credit utilization

Your credit utilization is the amount of credit you’re using at any given time. Credit experts say your credit utilization rate should be 30% or less, and it can hurt your credit score if it’s too high. This applies to your total balances across all your cards, so monitor your usage and use your cards wisely. 

Take advantage of rewards

Many credit cards offer a wide range of rewards, like miles, gas and cash back, all by making everyday purchases and paying them off each month. If you pay on time, and in full, you can earn free rewards without paying interest.

Keep your card safe

Always be on guard when using your credit card. Keep your card out of view of others, be mindful of your voice volume when giving your credit card number by phone and be sure you’re on a secure website when buying things online. 

Applying for a credit card

To get a credit card, you must first qualify. The only way to qualify is with an application that includes your personal details and financial information. You must also agree to a credit inquiry, which typically includes:

  • Full name

  • Date of birth 

  • Social Security number

  • Home address

  • Phone number

  • Email address

  • Annual salary

  • Other income 

  • Employer

If you do this online, approval only takes a few seconds. If you don’t get an instant approval, there’s likely something in your credit history that requires a manual review, and you may not get an answer for a few days.

There are credit cards for people with all types of credit. Make sure to choose a card that best fits your credit profile, based on your credit score:  

No credit score

If you don’t have a credit score, there are several options for you, including student credit cards, high-interest credit cards and secured credit cards.

Very poor credit (300-579)

This range represents the highest level of credit risk. If your score is in this range, you may be limited to secured credit cards and unsecured credit cards with the highest interest rates.

Fair credit (580-669)

Like the bad credit card range, this range also offers limited options with higher interest rates. Some companies even offer rewards cards at this range. These cards can help you build a solid credit history to secure a card with a better interest rate. 

Good credit (670-739)

In this range, credit card companies begin to offer more reasonable interest rates to borrowers and a wider variety of credit cards.

Very good credit (720-850)

This range gives you access to low interest rates and credit card perks. Credit scores in this range represent low risk.

Exceptional credit (800 to 850)

This range gives you access to premium interest rates, low fees and the best card rewards. Credit scores in this range represent the least amount of risk.

Want to learn more about credit cards? Learn about the different types of cards, how interest is calculated and the different types of fees in: How Do Credit Cards Work?