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Credit Card Definition and Facts contents
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Credit Card Definition and Facts

9 min read
Last Updated: February 27, 2025
Getting a credit card

Table of contents

Key Takeaways

  1. Credit cards allow you to borrow money against a credit line.

  2. You usually have to provide information about your income when you apply for a credit card.

  3. Many credit cards offer rewards, like cash back or miles.

Many people have credit cards, but not everyone understands the definition of a credit card and how it’s different from a debit card, or how credit cards work. There are also questions about how interest works on a credit card, different types of cards, and how to apply for a card. When you know the answer to some of the most common questions about credit cards, you could make better financial decisions.

Credit card definition

Credit cards are a means for the cardmember to borrow money against a line of credit for purchases or cash withdrawals. Credit cards are issued by banks or credit unions, and you can use them anywhere that accepts your credit card as payment. After making your monthly purchases, you must either pay the full outstanding balance each month or make at least the minimum payment on your balance.

How do credit cards work?

When you use a credit card, you’re borrowing money from the credit card issuer. The amount of money a credit issuer will allow you to borrow (your credit limit) is based on your credit history and credit score.

The money you borrow on a credit card is what you’ll need to pay back plus interest and any fees. Your credit card issuer typically charges interest when you don’t pay your entire balance by the due date. Some credit card companies may even charge an annual fee just for using the card.

Discover has no annual fee on any of  our cards.

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Most credit card issuers will report your credit history to credit bureaus, unlike debit cards or prepaid cards. When used responsibly, such as staying within your means and making on-time payments, credit cards can improve your credit score and financial standing.

What's the difference between credit cards and debit cards?

Credit cards offer the ability to make purchases even if you don’t have the funds at that time and may offer a higher spending limit than debit cards. However, credit cards also come with the risk of high interest rates if you don’t pay off your balance in full each month and fees if you don’t pay on time.

A debit card, on the other hand, is linked directly to your bank account. That means you can only spend what you have available in your account, otherwise the transaction will not go through. While this can help you avoid debt, it also means that you may not be able to make large purchases if you don’t have enough money in your account.

Different types of credit cards

There are different types of credit cards available, and each offers unique benefits. The one that’s ideal for you depends on your needs and goals. Here’s a breakdown of some different types of credit cards and what they offer.

Simply put, credit card rewards are incentives that a lender offers its cardmembers for using its card. Popular rewards include cash back or miles. For example, many travel credit cards offer one mile for every dollar you spend. However, with the Discover it® Miles Travel Credit Card, you can earn 1.5x Miles on every purchase.1 Plus, get an unlimited Mile-for-Mile match of all the Miles you earn at the end of your first year, automatically. There is no limit to how much we’ll match.2

Cash back is a perk that some credit card issuers offer that allows cardmembers to earn back a percentage of the money spent on that credit card on eligible purchases. Different cash back programs offer different redemption options. You may be able to use it as a credit toward your current statement, to shop online, to purchase gift cards, or simply have it deposited back into a connected bank account.

A secured credit card is backed by a deposit that you make with the issuer. The deposit serves as collateral for the credit limit on the card. This means that if you default on your payments, the issuer can use your deposit to cover the outstanding balance. The Discover it® Secured Credit Card helps you build/rebuild credit history with responsible use.3

A student credit card may be a good way for college students to start building their credit history. By using a student credit card responsibly and making on-time payments, students can begin to establish themselves as creditworthy borrowers. Student credit cards often have lower credit limits than regular credit cards, which can help students avoid getting in over their heads.

A retailer credit card is issued by a specific store or retail brand. Retailer cards are typically good only at that store or the store’s website.

 

Co-branded cards, such as those issued by hotels or airlines, might have different types of merchants that also accept them for payments. However, you might receive extra benefits on purchases of that brand’s product.

Did you know?

With the Discover it® Cash Back Credit Card, you can earn 5% cash back on everyday purchases at different places you shop each quarter, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases.

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Credit card facts and questions

Whether applying for a credit card for the first time or wondering about terms used in your credit card agreement, learn these credit card facts to help you better understand credit cards and avoid common credit misconceptions.

How do I apply for a credit card?

The credit card application process is straightforward and only needs some basic information such as your name, Social Security number, address, and income. Students will need the name and location of their school in addition to their Social Security number and home address.

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There are plenty of options on the market for people with limited credit history, like student cards and secured cards. Another option is that you can ask a friend or relative to add you as an authorized user on their card.

Instant approval means you’ll receive a quick answer to your application for a new credit card. Typically, only people with good to excellent credit scores get instant approval.

If you get a pre-approved credit card offer, that means that a credit card issuer checked with a credit bureau and saw that you meet its initial credit criteria. The card issuer pre-approved you as a quality candidate for its product. You’ll still need to apply to receive a new credit card, at which point you may still be accepted or denied based on your credit report.

Eighteen is typically the minimum age where you can apply for your own credit card in the United States. However, if you’re under 18, someone can add you as an authorized user on their account.

There is no right number of credit accounts to build a solid credit history. There are many factors that make up a credit score (and every credit bureau has different ways of calculating your score). In general, major factors of any credit score will include late or missed payments, frequency of credit inquiries, and how much of your credit you’re using (your credit utilization ratio). 

 

When you’re starting out with credit, it can be safer to begin with just one card to ensure you can make payments consistently before adding more. If you need more spending power, you can request a credit line increase, that way you can still keep your credit utilization ratio low while boosting the amount of available credit.

There are a few reasons your annual percentage rate (APR) can go up even if you’re up to date on all payments. These include a decrease in your credit score, the end of a card-related promotion, or a change in the prime rate if you have a variable-rate card.

You can manage your account at Discover.com, where you can also securely and quickly view transactions and make bill payments. You can also stay up to date on your account through text or email reminders.

While every credit card has different terms, most credit card fees can be avoided if you:

  • Choose a card without an annual fee. Discover cards all have no annual fee.
  • Pay your bill in full and on time every month to avoid interest charges. Late fees can impact your pocketbook, and late or missed payments can also have a negative effect on your credit score.
  • Limit cash advances. Most credit cards have a cash advance fee and charge higher interest on cash advances.

Advantages to online shopping with a credit card over a debit card usually include the ability to earn rewards on purchases. But the most significant difference has to do with fraud. If someone makes fraudulent charges with your debit card, the money comes directly out of your bank account. Even if you can get a refund, it may take time to get that money back. The FDIC recommends that you report fraud to your bank immediately.

 

With a credit card, you can dispute charges and your credit card company will investigate and issue applicable credits for fraud charges. If you haven’t paid your bill yet, the funds might not affect your account balance during the investigation. With Discover, you get a $0 Fraud Liability Guarantee. You’re never held responsible for unauthorized purchases on your Discover Card.5

Depending on your current standing and credit history, your credit card company may be able to approve a lower rate. Also consider a balance transfer to a card with a low or 0% introductory APR offer, but pay attention to balance transfer fees if you choose to do this.

A statement credit is a positive amount on your credit card bill. For example, if you accidentally overpay, most credit cards will apply a statement credit toward your future purchases. As mentioned, some rewards cards also allow you to redeem cash back for a statement credit, lowering your balance by using your cash rewards.

With Discover, your rewards never expire.6 Well credit your account or send you a check with your rewards balance if you close your account or if you don’t use the account within 18 months.

The bottom line

Credit cards can be a great way to build your credit history, rack up rewards, or simply make everyday purchases more convenient. But before you tap, swipe, or insert, it’s important to understand the basics of credit cards. With our guide in hand, you should feel equipped to make a decision that is right for your financial needs.

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