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If you’ve been wondering ‘How Does A Credit Card Work?’ we can tell you. A credit card is a line of credit. It allows you to spend borrowed money up to a certain limit each month. This limit is called a credit limit, and it is a limit – not a target! The credit is provided by your credit card provider, and you will have to pay back the money you spend, plus interest, once a month. You won’t always need to pay your debt off in full – many lenders will allow you to pay a small chunk of it, and pay the rest back at a later date. 

In addition to paying back what you borrow, your lender also charges interest of around 16.13%. 


Key Points: 

  • A credit card is a line of credit that you must pay back in addition to any interest applied to the loan. 
  • Credit limits are determined by lenders and will depend upon your financial past, current situation, and how many cards you have, alongside other factors. 
  • The average interest on a US credit card is around 16.13%. 
  • Failing to pay off your credit card debt can result in additional fees and damage to your credit score, making future borrowing even more difficult. 
  • You can apply online or in store. 
  • If you are seeking a new credit card, you could benefit from a 0% interest introductory offer. 


How Much Credit Can I Get? 

A credit limit refers to how much you are able to spend on a given credit card. The more you spend, the less credit you have left to splash that month. That is why you must plan ahead and ensure you spend within your means. 

Your credit limit is set by your lender. They will provide you with a quantity of credit that is high enough to entice you to use their service, but low enough that you will be able to keep on top of repayments. 

In 2020, the average credit card limit was around $30,000. 


How Is My Credit Limit Set? 

Your credit limit will be set according to a few factors: 

  • How Much You Earn – The more you earn, the higher your credit limit is likely to be. This is because your credit provider is safe in the knowledge that you will have money available to pay off your debts. 
  • Your Credit History – If your credit record illustrates that you have reliably paid off all debts in the past, then your limit will be higher. If you have shown that you struggle to pay off debts, then lenders will be reluctant to allow you access to sizable chunks of their money. It’s a good idea to check your credit score at least once a year for free.
  • Limits On Other Credit Cards – If you have many credit cards with large limits, the lender you are approaching will be reluctant to lend to you. This is because you are already stretched with debt, and they don’t want to lend to someone who may struggle to pay them back. If they do, they may offer you a very low limit. 


What If I Exceed My Credit Limit?

There are a few possible consequences. You may find that when you try to put a transaction through, your card is declined. This is because you have no funds left to cover the purchase. 

Your lender may also charge you additional fees if you go over your limit. This is in addition to the added interest on top of your credit, making borrowing that much more expensive. 

This may also damage your credit record, lowering your score, and inciting future trouble when trying to borrow money. This will be the gradual result of exceeding your limit time and time again. Nevertheless, you should carefully mind how much you are spending to protect your finances, for both now and the future. 


How Do I Get A Credit Card?

Look online or head into a local bank branch! There are plenty of options out there, and so much information available online. Using comparison websites can help you compare interest and maximum lines of credits, and help you understand which option is best for you. 

Informative websites like NerdWallet can help you further comprehend how credit cards differ from each other.  Once you have done your research, you can simply apply online, or apply in-store.


Can I Get An Interest-Free Credit Card? 

Yes – you can! Usually, 0% interest applies to introductory offers. After that, credit cards have an average interest rate of 16.13%. 

By choosing to take out a new credit card, you could benefit from interest-free credit for up to 21 months. For example, the Citi Simplicity Card and the Wells Fargo Reflect Card offer this. There are more firms that offer up to 15 months interest-free, including American Express and Bank of America. 




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