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As anyone who has ever watched their bank account balance decline after paying bills knows, owing money is no fun. But debt often serves an important function in people’s lives, putting things that can cost tens of thousands of dollars or more — like a college degree or a starter home — within reach.

Such cases aren’t quite the same as racking up a high credit card balance on restaurant meals and shopping trips, underscoring that when it comes to owing money, there can be good debt and bad debt.

What Is Debt Exactly?

It’s a simple four-letter word, yet debt is often not as straightforward as it may appear. Carrying a credit card balance? That’s debt. Have a student loan or car lease? Also debt.

When individuals owe money, they generally have to pay back more than the amount they borrowed. Most debt is subject to interest, the borrowing cost that is applied based on a percentage of money owed.

Interest accrues over time, so the longer consumers take to pay off debt, the more it may cost them.

Across people and households, debts add up. According to the Federal Reserve Bank of New York, by the end of 2022, total household debt climbed to $16.90 trillion.

Housing debt — specifically mortgages and mortgage refinancing — accounted for the majority of money owed, more than $12 trillion. Non-housing debt, such as credit card balances and school and car loans, accounted for the rest.

For individuals, average debt amounted to $101,915 in the fall of 2022, according to the credit reporting company Experian. While student loan debt was down slightly, shrinking by 1.2% from the year before — many other debts, including amounts owed on credit cards, personal loans, car loans, home equity lines of credit (HELOCs), and mortgages, all increased from the year before, according to Experian.

Recommended: Free Credit Score Monitoring

Good Debt vs Bad Debt

When you have debt, not only do you have to repay the money borrowed, but you also usually incur ongoing costs — specifically interest — which increase the amount you have to pay back.

While incurring more debt probably isn’t the most attractive proposition, there are occasions when taking on debt can be necessary or even beneficial in the long term. This is where good debt vs. bad debt comes in.

Though the idea of good vs. bad debt might seem complicated (and is often subject to some misconceptions), as a rule of thumb, the difference between good debt and bad debt usually has to do with the long-term results of borrowing.

Good debt is seen as money owed on expenditures that can build an individual’s finances over time, such as taking out student loans in order to increase one’s earning potential, or a mortgage on a house that is expected to appreciate in value.

Bad debt is money owed for expenses that pose no long-term value to a person’s financial standing, or that may even decrease in value by the time the loan is paid off. This can include credit card debt and car loans.

While owing money may not feel great, debt can serve some helpful functions. For starters, your credit score is used by lenders to determine eligibility and risk level when it comes to borrowing money.

Your credit score is based on your history of taking on and paying off debt, and helps to inform a lender about how risky a loan may be to issue. Your credit score can play an important role in determining not only whether a credit card or loan application will be approved but also how much interest you will be charged.

With no credit history at all, it may be harder for a lender to assess a loan application. Meanwhile, a solid track record of paying off good debt on time can help inspire confidence.

While there are no guarantees, good debt can also mean short-term pain for long-term gain. That’s because if paid back responsibly, good debt can be an investment in one’s future financial well-being, with the results ultimately outweighing the cost of borrowing.

Conversely, with bad debt, the costs of borrowing add up and may surpass the value of a loan.

Recommended: What is The Difference Between Transunion and Equifax?

What Is Considered Good Debt?

Mortgages

Like other lending products, mortgages are subject to annual interest on the principal amount owed.

In the United States, the average rate of a 30-year fixed-rate mortgage was averaging 6.28% nationally in April 2023, according to the Federal Reserve Bank of St. Louis. That’s up from 2022, when the average rate for a 30-year fixed-rate mortgage was 4.72%.

Meanwhile, data from the Federal Housing Finance Agency showed that home prices grew 8.4% from the end of 2021 to the fourth quarter of 2022.

This illustrates how the potential appreciation of a home might outweigh the cost of financing. But it’s best to not assume that taking on a mortgage to buy a house will increase wealth. Things like neighborhood decline, periods of financial uncertainty, and the individual condition of a home could reduce the value of a given property.

Personal loans or home equity loans used to improve the condition of a home may also increase its value, and in such instances may also be considered “good” debt.

Recommended: Should I Sell My House Now or Wait?

Student Loans

Forty-three percent of Americans who attended college incurred some kind of education debt, with most outstanding loans in a recent year coming in between $20,000 and $25,000, according to the Federal Reserve.

Cumulative income gains may eclipse the cost of a student loan over time.

But higher education may be linked with greater earnings, and cumulative income gains might eclipse the cost of a student loan over time.

According to the U.S. Bureau of Labor Statistics, the median weekly earnings for a bachelor’s degree holder are $1,547, which is more than $650 greater than the median weekly pay of someone with a high school diploma.

But just as taking out a mortgage is not a sure-fire way to boost net worth, student debt is not always guaranteed to result in greater earnings. The type of degree earned and area of focus, unemployment rates, and other factors will also influence an individual’s earnings.

Recommended: Staying Motivated When Paying Off Debt

What Is Considered Bad Debt?

Credit Card Debt

Credit cards can be useful financial tools if used responsibly. They may even provide cash back or other rewards. And because interest is generally not charged on purchases until the statement becomes due, using a credit card to pay for everyday purchases need not be costly if the balance on the card is paid before the billing cycle ends.

However, credit cards are often subject to high interest rates. According to the Federal Reserve Bank of St. Louis, the average annual interest rate for credit cards is 20.09% — but some charge rates even higher.

Credit card interest adds up, making that takeout dinner or pair of jeans far more costly than the amount shown on its price tag if a balance is carried over. For example, if you were to charge $500 in takeout food to a credit card with a 20% APR but only pay the $10 minimum each month, it would take nine years to pay off the full balance. The total amount paid — including interest — would be $1,084. That’s more than double the cost of those takeout meals!

Recommended: Does Net Worth Include Home Equity?

Car Loans

The dollar value of your car may not be what you think it is. Cars famously start to lose value the second you drive them off the lot. A new vehicle loses 20% or more of its value in the first year of ownership, according to Kelley Blue Book. After five years, a car purchased for $40,000 will be worth $16,000, a decrease in value of 60%.

But a car may also be necessary for getting around. For some individuals, owning a car can also help them earn or boost income, reducing or negating depreciation.

The Takeaway

Both good debt and bad debt can be stressful — and both types of debt can be more costly than they need to be if you don’t keep tabs on what you owe and pay back loans efficiently. A digital tracker could be the remedy.

SoFi gives you the information you need to manage debt, providing real-time financial insights and tracking so you can stay on top of what you owe.

Get spending breakdowns, credit score monitoring, and more — at no cost.

Track all your money in one place with SoFi.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Americans put a lot of money into their fuel tanks — from commuting to work to taking epic road trips — and gas credit cards are one option that can help cut the costs of getting around.

There are a few different types of gas credit cards to consider: branded gas cards that only work at specific gas stations, branded gas credit cards that you may be able to use elsewhere, and regular rewards credit cards that offer cash back or other incentives at the pump.

If you’re curious about the pros and cons of these cards, read on to learn:

•   What is a gas card?

•   How does a gas card work?

•   How do you get a gas card?

•   What’s needed for a gas card application?

What Is a Gas Credit Card?

So what is a gas card? The answer depends on whom you ask: The term can refer to a variety of different products (more on that in a moment). But at its most basic level, a gas credit card is a credit card that allows the cardholder to save money on gas, either with per-gallon discounts, cash-back rewards, or other incentives.

Given the wild fluctuations in the average price of gas, these cards can be an excellent way to lower your overall transportation costs, especially if you drive often. However, like any credit card, they do come with both risks and benefits.

Types of Gas Cards

As mentioned above, “gas credit card” and “gas card” can actually refer to several different products. Here’s a closer look.

Closed-loop gas cards

What is known as a closed-loop gas card is a card that can only be used at a specific gas station brand. They earn the cardholder discounts or rewards on money spent on that brand of fuel. They cannot be used at other gas stations or stores. This can make them convenient for those people who almost always go to the same gas station.

Of course, that limitation can also be too restrictive. Some people may want a card with more flexibility and capabilities. In addition, closed-loop gas cards can come with high interest rates, so if you don’t pay off your balance in full each month, you may actually end up spending more on gas overall.

Co-Branded Gas Station Credit Cards

Gas station credit cards vs. gas credit cards are co-branded. That means they bear the logo of both the gas station and a major credit card issuer, such as Visa or Mastercard. These cards may offer specific rewards at the pump. However, because they’re part of a major card network, they can also be used elsewhere.

These credit cards offer the benefit of being available for more general, all-purpose use. Of course, they also make it more possible to rack up debt on non-gas-related expenses, like cool shoes, the latest mobile device, or just about anything. As is true with any credit card, paying off your balance on time and in full each month is the best way to avoid paying interest on your purchases, which can quickly eclipse any rewards you might earn.

Traditional Gas Rewards Credit Cards

Finally, regular rewards credit cards may offer cash back, miles, points, or other rewards at the pump and elsewhere. Some rewards credit cards may allow borrowers to choose specific categories in which they’ll earn rewards at a higher rate, and the fuel pump might be one of those categories.

Traditional rewards credit cards offer ultimate flexibility in how and where you get rewarded for spending your money, so this could be an excellent choice for those whose budget fluctuates over time.

For instance, perhaps you spend a lot on gas over the summer because you’re taking road trips, but less so during the fall and winter. A traditional rewards credit card may allow you to choose gas stations as a category for part of the year — and another, more relevant category (like grocery stores) for the rest.

However, like all credit cards, they do come with the risk of falling into debt by carrying an ever-larger revolving balance.

How Do Gas Credit Cards Work?

Here’s how a gas card works in most situations: Although there are several different types of gas credit cards, they typically sync up with how any credit card works. You use the card at the point of sale to purchase gas and reap rewards or discounts. Usually this is done by swiping the card at the fuel terminal or, if it’s not a closed-loop card, at another point-of-sale system.

With non-closed-loop gas credit cards, you may also be able to use the card to make online purchases by typing in the relevant card information. (Always make sure the website you’re purchasing from is legitimate and secure before supplying your credit card number!)

Like any credit card, gas credit cards usually charge interest on revolving balances; that is, money you charge on the card and don’t pay off at the end of the statement period. Interest rates can be hefty — upwards of 20% APR (annual percentage rate) — which is part of what makes falling into credit card debt so possible. That’s why paying off your balance in full and on time, each and every month can be crucial.

If you can’t, you might consider consolidating your debt with a 0% balance transfer or personal loan.

Things to Consider Before Applying for a Gas Credit Card

While a gas credit card can help you save money at the pump, like any other credit card, it can also put you at financial risk, especially if you’re already struggling to make ends meet and pay down debt.

In addition, applying for a gas credit card will result in a hard inquiry on your credit report, which can lower (although usually only in the short-term) your credit score.

How to Get a Gas Credit Card

In terms of how to get a gas card, it’s similar to applying for a credit card of any kind. There will be information you need to share about yourself and your finances on a gas card application.

You can apply for gas credit cards at the gas station offering one or online. The application process will require basic demographic information, like your name and address, as well as financial information such as your employment situation and annual income. Once you’re approved for the card, you’ll receive it in the mail and can start using it for gas purchases — and, if it’s a major network credit card, purchases elsewhere, too.

Putting Money on a Gas Card

In addition to gas credit cards, there are also reloadable prepaid gas cards which are not credit cards. They’re more like debit cards in that you can use them only to access a finite amount of preloaded money on the card.
These types of cards can be a useful tool for managing gas spending and controlling your budget. You can load them with money at the gas station or online.

How to Pay With a Gas Card

How to pay for gas with a card works just as it would with any other card. You use it at the point-of-sale system (or present it to the person at the pump, if you’re in Oregon or New Jersey).

If you’re using a refillable gas card, you’ll need to load money on it ahead of time. If you’re using a credit card, you’ll get a monthly statement listing everything you’ve spent over the billing period and will have the opportunity to pay it off in full, which is a wise move vs. paying the minimum amount.

Is a Gas Credit Card Right for You?

If you find yourself spending a lot of money at the fuel pump, a gas credit card could help you pinch some pennies and get where you’re going for less. But like other credit cards, the risk of going into debt — or at least paying more than you need to after interest — is real. A prepaid gas card could be a good middle-ground option to help you stick to your transportation budget and manage your gas money budget more easily.

The Takeaway

There are multiple different types of gas credit cards, but they all generally have the same benefit: making the cost of gas more affordable by providing discounts or rewards at the pump. Whether you opt for a gas credit card or a reloadable gas card, this kind of product can make budgeting simpler, as long as used wisely.

Finding a credit card that can reward you for good financial decisions is a total game-changer, and that can be what the SoFi Credit Card does. With it, you’ll earn unlimited 2% cash back rewards, including those that can help you pay down debt.

The SoFi Credit Card: Put it to work in your wallet.

FAQ

What is the difference between a gas card and a credit card?

People may use the term “gas card” to refer to prepaid gas cards or gas credit cards specifically designed to offer the cardholder rewards at the pump. A regular credit card doesn’t necessarily offer any specific fuel savings, but a gas credit card can.

Does a gas card affect your credit?

If you apply for any credit card, the issuer will run a hard inquiry on your credit history, which may have a short-term negative effect on your credit score. In addition, late payments and high balances can drive your score down, as well, but paying off your debt in full and on time can help create a healthy credit history.

Can you buy other things with a gas card?

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Can you get cash back from a gas card?

Some gas credit cards offer cash back rewards. You can also find unlimited cash back rewards credit cards that aren’t specifically designed for gas savings but can still help you earn back a percentage of every dollar you spend.

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Photo credit: iStock/Eleganza

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

[The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

¹See Rewards Details at SoFi.com/card/rewards.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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In a rising interest rate climate, especially after historic lows, you may be more aware of purchase interest charges on your credit card statement. These charges are a wordy way of saying interest, which you owe when you don’t pay your credit card statement balance in full.

Americans pay about $120 billion per year in credit card interest and fees — about $1,000 per year for each household. Read on for more about credit card interest, including how it works and how to find your card’s interest rate.

What Is Credit Card Interest?

Credit card interest is what you’re charged by a credit card issuer when you don’t pay off your statement balance in full each month. Card issuers may charge different annual percentage rates (APRs) for different types of balances such as purchases, balance transfers, cash advances, and others. You may also be charged a penalty APR if you’re more than 60 days late with your payment.

An interest charge on purchases is the interest you are paying on the purchases you make with the credit card but don’t pay in full by the end of the billing cycle in which those purchases were made. The purchase interest charge is based on your credit card’s annual percentage rate (APR) and the total balance on that card — both of which can fluctuate.

Taking a closer look at your credit card balance and interest rate can help you figure out the best way to pay it off. Here’s some information about how purchase interest charges work and, in general, how interest works on a credit card.

Recommended: Average Credit Card Interest Rates

How Does Credit Card Interest Work?

Credit cards charge different APRs on purchases, cash advances, and balance transfers. The cardmember agreement that was included when you first received your credit card outlines the different APRs and how they’re charged. This information is also included in brief on each monthly billing statement, or you can contact your credit card issuer’s customer service department for this information. Another place to find how interest works on various credit cards is through the Consumer Financial Protection Bureau, which maintains a database of credit card agreements from hundreds of card issuers.

Some credit cards offer an introductory 0% interest rate. But once that promotional period ends, paying your balance in full each month is how you can avoid interest charges.

For example, you get a new credit card with a $5,000 available credit limit and 0% interest for three months. You use the credit card to buy a new computer that costs $3,000 and a designer dog house for your poodle that costs $1,000.

For each of the three interest-free months you pay only the minimum balance due. But since the full balance hasn’t been paid, your fourth statement will include a purchase interest charge. That is the interest you now owe because you did not pay off your credit card statement balance in full.

Credit card interest is variable, based on the prime rate, and banks typically calculate interest daily. A typical interest calculation method used is the daily balance method.

•   The bank will calculate the daily periodic rate, which is the APR divided by 365.

•   To each day’s balance, the bank will add any interest charge from the previous day (compounded interest) and any new transactions and fees, then subtract any payments or credits. This is the new daily balance.

•   The daily periodic rate is multiplied by the daily balance each day.

•   At the end of the billing cycle, each day’s balance is added together, resulting in the amount of interest owed.

•   If the amount owed is less than the minimum interest charge shown on the credit card’s fee schedule, the bank will charge the minimum.

You can make a payment toward your balance due at any time — you don’t have to wait until the due date. Since interest is commonly calculated daily, making multiple smaller payments rather than one large payment on the due date is one way to decrease the amount of interest you might owe at the end of the billing cycle. This can be a good strategy to use if you don’t pay your credit card bill in full each month. You’ll still owe some interest, but it may be less.

Recommended: APR vs. Interest Rate

What is a Purchase Interest Charge?

Sometimes also known as a finance charge, an interest charge on purchases is simply interest you pay on your credit card balance for purchases you made but didn’t pay in full. If you don’t pay off your balance each billing cycle, a purchase interest charge for the unpaid amount then becomes part of the total balance you owe.

For example, let’s say you owe $1,000 on a credit card, and because you did not pay that $1,000 in full you were charged a purchase interest charge of $90. You now owe $1,090, and then the next month’s purchase interest charge will be calculated based on a balance of $1,090.

This is called compound interest and can lead to a cycle of credit card debt. The interest charges continue to accrue if you’re not paying your balance in full every month.

How Do You Get Rid of a Purchase Interest Charge?

For a temporary reprieve from paying an interest charge on purchases, you might look for a credit card that has an introductory 0% APR. Some credit card issuers offer introductory rates for anywhere from 12 to 18 months for qualified applicants. If you make a plan for paying off the balance before the promotional period ends and you’re diligent about sticking to it, you could forgo paying interest on purchases made during that period.

Some people might choose this strategy rather than taking out a personal loan for a specific purchase. If you’re sure you can pay the balance in full while the APR remains at 0%, it could be a good strategy.

The only sure way not to pay a purchase interest charge is to pay your credit card balance in full each month.

Recommended: 11 Types of Personal Loans & Their Differences

Different Types of Credit Card Interest

Interest charges on purchases are just one type of interest charged on a credit card. Other transactions and fees may apply and must be disclosed to credit card applicants. The information can be found in a credit card’s rates and fees table often referred to as the “Schumer Box” after legislation introduced by Sen. Chuck Schumer as part of the Truth in Lending Act. The APR for purchases is typically at the top of the list, with others below.

•   Balance transfer APR: If you transfer a balance from one credit card to another, this is the rate you’ll pay on the amount of the transfer. You’ll also be charged interest at this APR on any balance transfer fee your card issuer might charge you.

•   Cash Advance APR and fee: Cash advance APRs tend to be much higher than purchase APRs, and there’s typically no grace period — interest starts accruing immediately. Like a balance transfer fee, you’ll be charged interest on a cash advance fee, too.

•   Penalty APR: If your credit card payment is more than 60 days late, your credit card issuer may increase your APR. If you make the next six consecutive payments on time, the card issuer must reinstate your original APR on the outstanding balance. But they are allowed to keep the higher penalty APR on any new purchases.

In addition to interest charges, there may also be fees charged. All of these fees could potentially accrue interest at their respective rates if the credit card’s balance is not paid in full by the payment due date.

•   Annual fee: Some credit cards charge an annual fee to the card holder.

•   Balance transfer fee: A fee of 3% to 5%, typically, on the amount transferred.

•   Cash advance fee: The greater of a flat dollar amount or a percentage of the cash advance.

•   Foreign transaction fee: A percentage of each transaction amount, in U.S. dollars.

•   Returned payment fee: Having insufficient funds in the bank account used to pay your credit card bill could result in a returned payment fee.

•   Late payment fee: Payments made after the statement due date will incur a late fee of at least $29 and not more than $40.

Where Can I Find My Credit Card’s Interest Rates?

There are several places you can locate your credit card’s interests rates and fees.

Anytime you receive a solicitation for a credit card, which is basically an advertisement, the credit card issuer is required by law to disclose the card’s possible interest rates and fees, as well as how interest is calculated. Since the recipient of this advertisement hasn’t been approved for the credit at this point, these numbers are estimations.

If you are going through a prequalification process for a credit card, the issuer should be able to provide you with more specific APRs so you can decide if that card is a good financial tool for you.

After you’ve been approved, the credit card issuer will mail you a packet containing your physical credit card and detailed information in a cardmember agreement. It’s a good idea to read this document thoroughly so you’re aware of all possible APRs and fees you could be charged.

If you access your credit card account online, you can also find this same detailed information on the card issuer’s website. You can call the card’s customer service telephone number for the information.

The Takeaway

If you’re one of the many people who carry a credit card balance, knowing how much interest you’re paying on different types of charges is important. Interest charges on purchases are likely the most common interest charges, and the amount of interest you may pay can add up quickly.

To keep from paying interest on purchases at all, it’s important to pay your credit card balance in full each month. If you don’t, you’ll accrue interest, which compounds and can create a debt cycle.

3 Personal Loan Tips

1. Before agreeing to take out a personal loan from a lender, you should know if there are origination, prepayment, or other kinds of fees. If you get a personal loans from SoFi, there are no-fee options.
2. If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.
3. Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

Learn more about how a personal loan from SoFi can help you get out of credit card debt.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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There are millions of credit card accounts in the United States alone, and it’s estimated that 84% of adults in the U.S. have at least one credit card. Yet, many people don’t have a firm grasp on the basics of what a credit card is and how credit cards work.

If you have a credit card account, or plan on ever using one, it’s important to understand the fundamentals of credit cards. This ranges from what a credit card is to how credit card interest works to how credit cards relate to credit scores.

Recommended: Tips for Using a Credit Card Responsibly

What Is a Credit Card?

A credit card is a type of payment card that is used to access a revolving line of credit.

Credit cards differ from other types of loans in that they offer a physical payment card that is used to make purchases. Traditionally, credit cards are made of plastic, but an increasing number of credit card issuers now offer metal cards, usually for their premium accounts that offer travel rewards.

But a credit card account is much more than a plastic or metal payment card. A credit card account is a powerful financial tool that can serve many purposes. For starters, it can be a secure and convenient method of payment anywhere that accepts credit card payments. It also can be used to borrow money in a cash advance or to complete a balance transfer.

Additionally, credit cards can offer valuable rewards, such as cash back and travel rewards like points or miles. Cardholder benefits can also include purchase protection and travel insurance policies.

If used responsibly, a credit card can help you to build your credit score and history, which can open up new borrowing opportunities. Of course, credit cards can also damage your credit when used irresponsibly. If you rack up debt on your credit card, it can be hard to get it paid off and back in the clear (here, for instance, is what happens to credit card debt when you die).

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

How Do Credit Cards Work?

Credit cards offer a line of credit that you can use for a variety of purposes, including making purchases, completing balance transfers, and taking out cash advances. You can borrow up to your credit limit, and you’ll owe at least the minimum payment each month.

You can apply for a credit card from any one of hundreds of credit card issuers in the U.S. Card issuers include national, regional, and local banks, as well as credit unions of all sizes. Card issuers will approve an application based on the credit history and credit score of the applicant, among other factors.

There are credit cards designed for people with nearly every credit profile, from those who have excellent credit to those with no credit history or serious credit problems. As with any loan, those with the highest credit score will receive the most competitive terms and benefits.

Once approved, you’ll likely receive a credit limit that represents the most you can borrow using the card. Whether your limit is above or below average credit card limit depends on a variety of factors, including your payment history and income.

The credit card is then mailed to the account holder and must be activated before use. You can activate a credit card online or over the phone. So long as your account remains in good standing, it will be valid until the credit card expiration date.

Once activated, the card can be used to make purchases from any one of the millions of merchants that accept credit cards. Each card is part of a payment network, with the most popular payment networks being Visa, Mastercard, American Express, and Discover. When you make a payment, the payment network authenticates the transaction using your card’s account number and other security features, such as the CVV number on a credit card.

Every month, you’ll receive a statement from the card issuer at the end of each billing cycle. The statement will show the charges and credits that have been made to your account, along with any fees and interest changes being assessed.

Your credit card statement will also show your balance, minimum payment due, and payment due date. It’s your choice whether to pay your minimum balance, your entire statement balance, or any amount in between. Keep in mind that you will owe interest on any balance that’s not paid back.

If you don’t make a payment of at least the minimum balance on or before the due date, then you’ll usually incur a late fee. And if you pay more than your balance, you’ll have a negative balance on your credit card.

Credit Card Fees

There are a number of potential fees that credit card holders may run into. For example, some credit cards charge an annual fee, and there are other fees that some card issuers can impose, such as foreign transaction fees, balance transfer fees, and cash advance fees. Cardholders may also incur a late fee if they don’t pay at least the minimum due by their statement due date.

Often, however, you can take steps to curb credit card fees, such as not taking out a cash advance or making your payments on-time. For a charge like an annual fee, cardholders will need to assess whether a card’s benefits outweigh that cost.

3 Common Types of Credit Cards

There are a number of different kinds of credit cards out there to choose from. Here’s a look at some of the more popular types.

Rewards Credit Cards

As the name suggests, rewards credit cards offer rewards for spending in the form of miles, cash back, or points — a rewards guide for credit cards can give you the full rundown of options. Cardholders may earn a flat amount of cash back across all purchases, or they may earn varying amounts in different categories like gas or groceries.

The downside of these perks is that rewards credit cards tend to have higher annual percentage rates (APRs), so you’ll want to make sure to pay off your full balance each month.

Balance Transfer Credit Cards

Balance transfer cards allow you to move over your existing debt to the card. Ideally, this new card will have a lower interest rate, and often they’ll offer a lower promotional rate that can be as low as 0% APR. However, keep in mind that this promo rate only lasts for a certain period of time — after that, the card’s standard APR will kick back in.

Secured Credit Cards

If you’re new to credit or trying to rebuild, a secured credit card can be a good option. Generally, when we talk about credit cards, the default is an unsecured credit card, meaning no collateral is involved. With a secured credit card, you’ll need to make a deposit. This amount will generally serve as the card’s credit limit.

This deposit gives the credit card issuer something to fall back on if the cardholder fails to pay the amount they owe. But if you’re responsible and get upgraded to a secured credit card, or if you simply close your account in good standing, you’ll get the deposit back.

How Does Credit Card Interest Work?

The charges you make to your credit card are a loan, and just like a car loan or a home loan, you can expect to pay interest on your outstanding credit card balance.

That being said, nearly all credit cards offer an interest-free grace period. This is the time between the end of your billing period and the credit card payment due date, typically 21 or 25 days after the statement closing date. If you pay your entire statement balance before the payment due date, then the credit card company or issuer will waive your interest charges for that billing period.

If you choose not to pay your entire statement balance in full, then you’ll be charged interest based on your account’s average daily balance. The amount of interest you’re charged depends on your APR, or annual percentage rate. The card issuer will divide this number by 365 (the number of days in the year) to come to a daily percentage rate that’s then applied to your account each day.

As an example, if you had an APR of 15.99%, your daily interest rate that the card issuer would apply to your account each day would be around 0.04%.

Recommended: Average Credit Card Interest Rates

Credit Cards vs Debit Cards

Although they look almost identical, much differs between debit cards vs. credit cards. Really, the only thing that debit cards and credit cards truly have in common is that they’re both payment cards. They both belong to a payment network, and you can use them to make purchases.

With a debit card, however, you can only spend the funds you’ve already deposited in the checking account associated with the card. Any spending done using your debit card is drawn directly from the linked account. Because debit cards aren’t a loan, your use of a debit card won’t have any effect on your credit, positive or negative.

But since it isn’t a loan, you also won’t be charged interest with a debit card, nor will you need to make a minimum monthly payment. You will, however, need to make sure you have sufficient funds in your linked account before using your debit card.

Another key difference between credit cards vs. debit cards is that credit card users are protected by the Fair Credit Billing Act of 1974. This offers robust protections to prevent cardholders from being held responsible for fraud or billing errors. Debit card transactions are subject to less powerful government protections.

Lastly, debit cards rarely offer rewards for spending. They also don’t usually feature any of the travel insurance or purchase protection policies often found on credit cards. You likely won’t be on the hook for an annual fee with a debit card, which is a fee that some credit card issuers do charge, though you could face overdraft fees if you spend more than what’s in your account.

To recap, here’s an overview of the differences between credit cards and debit cards:

	Credit cards	Debit cards
Can be used to make purchases	Yes	Yes
Can be used to borrow money	Yes	No
Must deposit money before you can make a purchase	No	Yes
Must make a minimum monthly payment	Yes	No
Can provide purchase protection and travel insurance benefits	Often	Rarely
Can offer rewards for purchases	Often	Rarely
Can help or hurt your credit	Yes	No
Can use to withdraw money	Yes, with a cash advance	Yes

Pros and Cons of Using Credit Cards

Beyond knowing what a credit card is, it’s important to familiarize yourself with the pros and cons of credit cards. That way, you can better determine if using one is right for your financial situation.

To start, notable upsides of using credit cards include:

•   Easy and convenient to use

•   Robust consumer protections

•   Possible access to rewards and other benefits

•   Ability to avoid interest by paying off monthly balance in full

•   Potential to build credit through responsible usage

However, also keep these drawbacks of using credit cards in mind:

•   Higher interest rates than other types of debt

•   Temptation to overspend

•   Easy to rack up debt

•   Various fees may apply

•   Possible to harm credit through irresponsible usage

How to Compare Credit Cards

Since there are hundreds of credit card issuers, and each issuer can offer numerous individual credit card products, it can be a challenge to compare credit cards and choose the one that’s right for your needs. But just like purchasing a car or a pair of shoes, you can quickly narrow down your choices by excluding the options that you aren’t eligible for or that clearly aren’t right for you.

Start by considering your credit history and score, and focus only on the cards that seem like they align with your credit profile. You can then narrow it down to cards that have the features and benefits you value the most. This can include having a low interest rate, offering rewards, or providing valuable cardholder benefits. You may also value a card that has low fees or that’s offered by a bank or credit union that you already have a relationship with.

Once you’ve narrowed down your options to a few cards, compare their interest rates and fees, as well as their rewards and benefits. You can find credit card reviews online in addition to user feedback that can help you make your final decision.

Important Credit Card Terms

One of the challenges to understanding how credit cards and credit card payments work is understanding all of the jargon. Here’s a small glossary of important credit card terms to help you to get started:

•   Annual fee: Some credit cards charge an annual fee that users must pay to have an account. However, there are many credit cards that don’t have an annual fee, though these cards typically offer fewer rewards and benefits than those that do.

•   APR: This stands for annual percentage rate. The APR on a credit card measures its interest rate and fees calculated on an annualized basis. A lower rate is better for credit card users than a higher rate.

•   Balance transfer: Most credit cards offer the option to transfer a balance from another credit card. The card issuer pays off the existing balance and creates a new balance on your account, nearly always imposing a balance transfer fee.

•   Card issuer: This is the bank or credit union that issues the card to the cardholder. The card issuer the company that issues statements and that you make payments to.

•   Cash advance: When you use your credit card to receive cash from an ATM, it’s considered a cash advance. Credit card cash advances are usually subject to a much higher interest rate and additional fees.

•   Chargeback: When you’ve been billed for goods or services you never received or that weren’t delivered as described, you have the right to dispute a credit card charge, which is called a credit card chargeback. When you do so, you’ll receive a temporary credit that will become permanent if the card issuer decides the dispute in your favor.

•   Due date: This is the date you must make at least the credit card minimum payment. By law, the due date must be on the same day of the month, every month. Most credit cards have a due date that’s 21 or 25 days after the statement closing date.

•   Payment network: Every credit card participates in a payment network that facilitates each transaction between the merchant and the card issuer. The most common payment networks are Visa, Mastercard, American Express, and Discover. Some store charge cards don’t belong to a payment network, so they can only be used to make purchases from that store.

•   Penalty interest rate: This is a separate, higher interest that can apply to a credit card account when the account holder fails to make their minimum payment on time.

•   Statement closing date: This is the last day of a credit card account’s monthly billing cycle. At the end of this day, the statement is generated either on paper or electronically, or both. This is the day on which all the purchases, payments, fees, and interest are calculated.

Credit Cards and Credit Scores

There’s a lot of interplay between credit cards and your credit score.

For starters, when you apply for a new credit card, that will affect your score. This is because the application results in a hard inquiry to your credit file. This will temporarily ding your score, and it will remain on your credit report for two years, though the effects on your credit don’t last as long.

Further, how you use your credit card can impact your credit score — either positively or negatively. Having a credit card could increase your credit mix, for instance. Or, closing a longstanding credit card account may shorten the age of your accounts, resulting in a negative impact to your score.

Making timely payments is key to maintaining a healthy credit score, as is keeping a low credit utilization rate (the amount of your overall available credit you’re currently using). If you max out your credit card or miss payments, that won’t bode well for your credit score. Conversely, staying on top of payments can be a great step toward building your credit.

The Takeaway

Credit cards work by giving the account holder access to a line of credit. You can borrow against it up to your credit limit, whether for purchases and cash advances. You’ll then need to pay back the amount you borrowed, plus interest, which is typically considered to be a high rate vs. other forms of credit. For this reason, it’s important to spend responsibly with a credit card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How does a person shop for a credit card?

To shop for a credit card, start by looking at your credit score to determine what cards you may be able to qualify for. Then, decide what kind of card is best for your needs, such as a card that has a low interest rate, one that will allow you to build credit, or a card that offers rewards. Finally, compare similar products from competing card issuers to assess which is the most competitive offer available to you.

Can I use my credit card abroad?

Yes, most credit card payment networks are available in most countries. As long as you visit a merchant that accepts cards from the same payment network that your card belongs to, then you’ll be able to make a purchase.

How do you use a credit card as a beginner?

If you’re new to credit and working to build your score, you’ll want to make sure you’re as responsible with your card as possible. Pay your bill on time, and aim to pay in full if you can to avoid interest charges. Use very little of your credit limit — ideally no more than 30%. And make sure to regularly review your credit card statements and your credit report. But don’t let any of that scare you away from using your card either — it’s important to regularly use your card for small purchases to get your credit profile built up.

How do credit cards work in simple terms?

Credit cards offer access to a line of credit. You can borrow against that, up to your credit limit, for a variety of purposes, including purchases and cash advances. You’ll then need to pay back the amount you borrowed.

How do payments on a credit card work?

At the end of each billing cycle, you’ll receive a credit card statement letting you know your credit card balance, minimum payment due, and the statement due date. You’ll then need to make at least the minimum payment by the statement due date to avoid late fees and other consequences. If you pay off your full balance, however, you’ll avoid incurring interest charges. Otherwise, interest will start to accrue on the balance you carry over.

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Photo credit: iStock/Katya_Havok

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Claiming unclaimed money from a deceased relative can be fairly straightforward — or more complicated — depending on state inheritance laws and the amount of supporting evidence to back the claim.

When a person dies without a will or other legally binding document outlining the distribution of their financial assets, that money may become “unclaimed” after a designated period of time. Unclaimed money is often turned over to the state where that person lived. However, it is possible for relatives to claim that money through the appropriate channels.

What Happens to Unclaimed Money from Deceased Relatives?

When no direct heir is identified, unclaimed money and assets from a deceased relative go to the state government. How soon the money goes to the state after the person dies will vary according to that state’s inheritance laws.

Once unclaimed money ends up in the hands of the government, the state authority will try to identify any relatives that are entitled to claim the money. Typically, a description of the assets and the name of the deceased are posted to one or several public and searchable websites. Some examples of these websites are:

•  Unclaimed.org

•  MissingMoney.com

•  TreasuryDirect.gov

•  FDIC.gov and NCUA.gov

•  PBGC.gov

•  UnclaimedRetirementBenefits.com

•  ACLI.com

Can You Claim Unclaimed Money From a Deceased Relative?

If you believe you are entitled to an unclaimed financial asset of a deceased relative, you can file a claim with the state government or business that is holding it. If you are specifically named as a beneficiary in the deceased relative’s will, the claim process can be relatively smooth. If not, you may still be able to claim that money but it will require supporting documentation or potentially a decision from a presiding probate court judge to ultimately verify the claim.

Recommended: How Much Does It Cost to Make a Will?

What Types of Financial Assets Can Be Claimed from Deceased Relatives?

Unclaimed money doesn’t necessarily have to be in the form of cash; it can also include other assets of value such as:

•  Real estate

•  Forgotten bank accounts

•  Bonds

•  Stocks

•  Certificates of deposit

•  Annuities

•  Royalties

•  401(k)s and other retirement plans

•  Vehicles and other physical assets

Recommended: Unclaimed Money from Scholarships and Grants

What to Expect From the Unclaimed Money Process

If you’re planning to claim unclaimed money, the process will vary depending on the state you’re filing in and the asset in question. In some cases, you can file a claim online, provide proof of identity and any documented proof of ownership, and wait for your claim to be processed. Once the claim is approved, you receive the money.

In situations where the deceased did not have a will or an executor for the will, a probate court will typically appoint someone to oversee any ownership claims and asset transfers. If this is the case, you may have to wait longer or provide more documented proof in court before your claim is approved.

Once your claim is approved and you receive the money owed to you, you may be required to pay inheritance tax. Again, this depends on which state the deceased lived in. However, spouses are exempt from paying inheritance tax in every state.

The Takeaway

Claiming unclaimed money from a deceased relative is entirely possible. However, the complexity of the process will ultimately depend on the circumstances and location of the deceased. If you believe you’re entitled to claim unclaimed money from a deceased relative, leveraging an estate planning attorney or a financial advisor can help demystify the process and any specifics about your claim.

It’s never too early to be thinking about your own estate planning needs and long-term financial goals.

SoFi can give you the tools to start tracking your money, pay off debt faster, and see the big picture of your finances.

FAQ

How do you know if a deceased loved one has left you money?

If a deceased relative has named you as a beneficiary in their will or another legally binding contract, the executor of that document or a probate court will likely reach out to inform you of any unclaimed money you are entitled to. If not, you can still check to see if you are entitled to money by searching one of the public online unclaimed-money databases or by reaching out to the deceased relative’s financial advisor or estate planner.

How do I find assets of a deceased person?

To find the assets of a deceased relative, try looking through their personal property, reach out to relatives and other friends with knowledge of their financial affairs, or inquire with the local probate court or state government agencies.

What happens when you inherit money?

Depending on where you inherit money, you may be required to pay inheritance tax. After that, you are free to do with the money as you please. However, it is often advisable to think hard about how to use that money to support your financial needs or long-term goals.

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Photo credit: iStock/mdphoto16

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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