Credit Card (Consumer)

Author: Noah Gomez

Published: 5 October 2023

A credit card is a consumer financial product that allows cardholders to make fraud-protected purchases using borrowed money they repay on a periodic basis, but not monthly. Credit cards provide a debt limit per period that does not incur interest when paid ~21 days or earlier after the end of the billing period, as per law.

credit cards are short term debt for everyday expenses; image displays key metrics and features

Credit cards are not the same as loans, which provide a lump sum of money at the start of the agreement and must be repaid by a predefined date, usually in installments.


  • Purpose: short-term debt for everyday expenses.
  • Fraud-protection is a key benefit.
  • Monthly repayment with ~21 day grace period.
  • Rewards are cash back, miles, or points.
  • Cash back ≥2% is generally preferable; fewer restrictions than miles/points.
  • 80%: average approval rate.
  • $6,263: average credit limit.
  • 40% of Americans have a credit card balance; 38% carry a balance monthly.
  • 3.03%: credit card debt of total household debt among non-debt-free families.
  • Billing cycles ≠ months.
  • Costs: interest (purchase, transfer, advance), fees (annual, transaction, penalty).


A credit card is a payment method that provides short term debt in the form of an advance for everyday expenses.


The purpose of credit cards is to provide short-term debt to consumers that need to make fraud-protected purchases for which they do not have sufficient funds or for which they want to collect rewards.

Purchasing Tool — Not Funding Tool

To understand credit cards, borrowers must first recognize that they are a tool for daily purchases. Credit cards are designed for everyday consumer expenses and not for asset acquisition or to fund major purchases. In "proper finance" parlance, this is called working capital.

Consumers who plan to pay a large expense—such as a washing machine or water heater—should consider whether a personal loan is more appropriate.

Revolving Credit

Credit cards are revolving credit, as opposed to closed-end credit, which means the borrower has access to a reusable amount of debt that can be carried or repaid over time. For example, imagine a monthly revolving line for $1,000.

The borrower uses $500 in month 1 and pays back $250 at the end of the month. In month 2 she has $750 in available credit and a $250 balance that incurs interest daily.

During month 2, she uses another $100 and has a total balance of $350. No interest accrues on the $100 as long as she pays it at month end, but the $250 continues to incur interest.

This is how credit cards work, but federal law establishes a minimum grace period (during which previous month balances do not incur interest) of 21 days.


According to Federal Reserve data¹, approximately 40% of Americans have a credit card balance, and 38% of Americans carry a balance month to month.

Moreover, credit card debt represents 3.03% of total household debt among the 74% of American families that are not debt-free.

Note: this data comes from the Survey of Consumer Finances based on a representative sample of roughly 30,000 U.S. households. It is the most comprehensive survey on consumer debt in the United States.

Parties Involved

Credit cards, like all debt, consist of at least 1 borrower and 1 lender. With credit cards, the lender is known as the "card issuer" and the borrower is known as the "cardholder."

Card Issuer

The card issuer is the lending institution that sets the amount, interest, rewards, fraud protection and other terms of the card. They also provide the credit used on transaction. However, card issuers do not facilitate underlying transactions, which is the role of card networks.

Card Networks

Card networks such as VISA® and MasterCard® do the technical background work to facilitate payments between buyer and seller banks. They do not lend money.

Merchant (Seller)

The merchant is the party that accepts the credit card. Merchants must agree to accept the card network used because they pay an interchange (small) fee for the service.


The cardholder is the consumer who agrees to borrow money and repay it on a revolving basis when making purchases. They benefit from fraud-protection, rewards, and deferred payment.

Major Card issuers

Card issuers are financial institutions that perform the lending service associated with credit cards. They are not the same as card networks, which handle underlying technical legwork (i.e. VISA® and MasterCard®).

Below is a list of the top 7 issuers in the United States.

  • Chase
  • Bank of America
  • Wells Fargo
  • U.S. Bank
  • Capital One
  • Discover
  • Citibank

Cash Advance a Key Concept

At their core, credit cards advance cash to the cardholder. Strip away the jargon, and the essential role of a credit card is to provide an advance on cash that the cardholder expects to receive later in the month.

That said, the term "Cash Advance" has evolved to mean the use of a credit card to withdraw cash from an ATM or via Cash Back at the register. This is an important concept because Cash Advance transactions to not benefit from grace periods like normal Purchases.

Fraud Protection a Key Selling Point

Credit cards usually offer fraud-protection on transactions the borrower does not authorize. If a borrower notices a non-authorized transaction, she can contact the card issuer for a full reimbursement. This is known as zero-liability fraud protection, and it comes standard with most credit cards.

This feature is not usually available on debit cards, which means credit cards are safer than the debit alternatives.


Good credit cards offer strong rewards for using them. In addition to fraud-protection, rewards provide strong incentive to use credit cards because the borrower can effectively earn discounts on every purchase. There are three kinds of rewards, shown below.

  • Cash Back. The most common reward type, cash back usually provides 1% - 5% cash on select transactions. The money can be used for other purchases, to pay off the card balance, or even as a direct cash withdraw. The card issuer determines the amount and use of cash back, as well as whether to offer it at all. In most cases, rewards vary based on the item purchased. For example, the Discover It® card provides 5% of gas and groceries, as well as 1% on all other purchases (as of writing).
  • Airline Miles. Card issuers work with select airlines to provide travelers with rewards on each mile they travel. Usually, 1 mile traveled equals 1 mile rewards. However, 1 mile reward does not equal 1 mile discounted. Each airline determines its own mile-to-benefit conversion, with an average of 1 mile = ¢1 USD. Credit card miles are not the same as airline company miles, which is simply a rewards program offered by airlines for continually using them regardless of payment method.
  • Points. Points are similar to miles, except they're not exclusive to airline purchases. They accumulate on purchases at an average rate of 1 point = ¢1 USD like miles, but they can be converted into a number of other rewards, such as cash back and discounts. The card issuer defines point uses in their offer, and there is no standard.

Cash Back > Miles & Points

In general, cash back programs greater than 1% are superior to miles and points. The reason is arithmetic.

A 1% cash back program generates $0.01 per dollar spent, which is the same amount as 1 point or 1 mile (1 point/mile = $0.01).

In addition, points and miles usually have spending restrictions while cash back can be used for nearly any purpose.

Borrowers who travel often or often buy point-related items may find an exception, but a good rule of thumb is to prefer cash back programs ≥2%.

Billing Cycle & Due Date

A large source of confusion around credit cards is billing cycles and due dates. Most importantly, billing cycles are NOT months.

A billing cycle is a one-month period that ends on the same day each month, but rarely on the last day of the month. For example, Truist's Platinum MasterCard® Rewards Card ends on the 5th and starts on the 4th of each month.

The due date is at minimum 21 days after the end of the billing cycle. For the Truist card, this would be the 25th of each month.

Consumers must make the minimum payment by the due date to keep their account in good standing.

Minimum Monthly Payment

Minimum Monthly Payments (MMPs) are the lowest debt payoff value consumers can make and keep their account in good standing. MMPs usually represent 1% — 5% of the cards outstanding balance or a flat amount such as $10 — $50, whichever is higher.

For example, imagine a card with minimum monthly payment of 2% or $25, whichever is greater. In month 1, the cardholder uses $200 in credit. The monthly minimum payment is therefore $25, because $25 is greater than $4 (2% * $200).

In month 2, the cardholder uses $1,500 in credit. The monthly minimum is therefore $30, because 2% * $1,500 is greater than $25.

Minimum monthly payments allow consumers to put off payments longer than the billing cycle without damaging their credit.

However, they usually trigger the addition of purchase transactions to daily balance (see next 2 sections). The cardholder therefore ends up with interest charged retroactively and compounding daily over two billing cycles unless s/he pays the balance mid-cycle.

Minimum payments are a leading cause of credit card debt cycles. They're also the source of the myth that leaving a balance month-over-month builds credit as a reward from the card company for paying interest.

Transaction Types (Segments)

Credit cards are first and foremost purchasing tools, but they also serve as debt management and physical cash purposes. Below is a description of these three transactions, called "segments" in most card agreements.

Card agreements treat each type differently. Namely, grace periods, promotional interest rates, penalty fees, and penalty interest rates apply differently to each.

  • Purchases. Transactions in which the card is used to buy a good or service.
    • Grace period: Full 21-day grace period applies.
    • Promotional APR: A reduced APR may apply for a limited time after card opening.
    • Penalty fees: A penalty may apply when the minimum amount is not paid by the agreed date.
    • Penalty APR: A penalty APR may apply on unpaid balances.
    • Foreign transaction fee. A fee may apply for transactions that take place in a foreign currency.
  • Balance transfers. The transfer of an outstanding balance from one card to another, usually to obtain lower interest or benefit from 0% APR for a limited time.
    • Grace period: Balance transfers do not benefit from the grace period and begin accumulating interest from the date they post.
    • Promotional APR: It is very common for balance transfers to benefit from a 0% or reduced APR. This incentivizes borrowers to change card companies.
    • Penalty fees: Usually 3% - 5% of the amount transferred.
    • Penalty APR: Penalty APRs for balance transfers are rare because consumers would have little reason to change providers.
  • Cash advance. The withdraw of cash from an ATM or at a bank using the credit card, as well as similar cash-like transaction such as travelers checks, foreign currency, cryptocurrency, money orders, peer-to-peer transfers, wire transfers, lottery tickets, casino gaming chips, or race track wagers or similar betting transactions. Basically, anything other than buying goods and services.
    • Grace period: Cash Advances do not benefit from a grace period, except in rare cases.
    • Promotional APR: It is very uncommon for cash advances to have promotional APRs.
    • Penalty fees: Usually 3% - 5% of the cash advance amount.
    • Penalty APR: A penalty (high) APR may apply to cash advances whose minimum balance is not paid by the agreed date.

Grace Period

Grace periods are extremely important for healthy credit card management.

The days between the end of billing cycle and the due date is the grace period. During this time, outstanding balances on purchases do NOT incur interest. Federal law requires the grace period be at least 21 days, but some card issuers allow up to 29 days.

However, balance transfers and cash advances (almost) always incur interest from the date of transaction.

Additionally, purchase balances that are not paid in full and on time in a month trigger interest charges from the date of the transaction, retroactively. New purchases also begin incur interest from the date of transaction.


There are two credit card cost categories: interest and fees. Below is a description of each and its subcategories.

  • Interest. Interest costs are percentages charged on purchases, balance transfers, and cash advances.
    • Purchase interest (APR). The basic purchase interest charged on balanced not paid 21 days after the end of the billing cycle.
    • Balance transfer interest (APR). APR applied to the balance transfer transaction segment. It is usually the same or lower than the purchase APR.
    • Cash advance interest (APR). APR applied to the cash advance transaction segment. It is usually the same or higher than the purchase APR.
    • Penalty interest (APR). An APR charged when the cardholder does not make the minimum payment by the due date. It can be applied retroactively on unpaid balances or apply on balances after the missed payment. Penalty APR can apply to purchases, balance transfers, or cash advances.
  • Fees. Fees are relative or absolute amounts charged on non-purchase transactions, in cases of delinquent activity, or simply as a flat fee to use the card.
    • Annual fees. Some credit cards charge flat fees to have access to the card. Annual fees usually accompany cards with strong rewards programs.
    • Transaction fees. Transaction fees are one-off charges on balance transfer and cash advance segments and usually consist of 3% - 5% of the transaction amount. There may also be a transaction fee in a similar amount for transactions that occur in a foreign currency, such as Euros or Great British Pounds.
    • Penalty fees. Penalty fees arise when the borrower or his/her bank does not make a payment as agreed.
      • Late. Late payment fees arise when the borrower makes the minimum payment later than 21 days after the end of the billing cycle, or another payment date.
      • Returned payment. Returned payment fees arise when the borrower's bank does not transfer a payment, whether via auto-pay or manually.

Average Annual Percentage Rate (Rate)

The average APR has historically been about 15%, with a sharp increase above 20% in 2022-2023. The graph below shows APR evolution from 2013 to 2023 based on data from the Federal Reserve³.

Schumer Box

The Schumer Box is a legally-required table of interest and fees designed in Appendix G of 12 CFR 1026.60. It appears on every cardholder agreement or fees disclosure in the United States. If any of the costs covered above apply to the card, they are shown in the Schumer Box.

Below is the image of Appendix G-10(C), which is the a sample Schumer box and the most comprehensive outline of disclosure requirements available.


This document includes all possible interest and fees, but only relevant portions must be disclosed.

For example, if a card does not offer balance transfer, the interest and fee section related to transfers is absent. The Apple Card agreement is famously short because it only allows purchases.

The Average Daily Balance Method

Interest calculations on credit cards is different from methods consumers are familiar with, such as savings accounts and installment loans. In fact, few consumers are aware that credit card interest has automatic compounding.

Almost all major credit cards use the "average daily balance" method. This method has three steps.

  1. First, it calculates the daily balance by taking the starting balance + new transactions + interest on previous days balance — payments —credits (such as rewards).
  2. Second, it calculates the average of these daily balances by taking the sum of all daily balances from step one and dividing by the number of days in the billing period.
  3. Third, it multiples the average daily balance from step 2 by the interest rate and by the number of days in the period.

The interest charged daily in step 1 is automatically compounded by the rate in step 3.

However, new purchases (not balance transfers or cash advances) in the period are not added to the daily balance. This means they do not generate interest, as long as the cardholder pays on time.

It is critical to understand this method because it is the cause of credit card debt traps. Consumers often assume balance transfers and cash advances are absent from the daily balance like purchases, and they further misunderstand that leaving a balance triggers the inclusion of purchases in daily balance, usually for two consecutive cycles.

Borrowers can always read their card's interest calculation method by searching for "How Do You Calculate The Interest Charge?", "How We Calculate The Interest Charge", or "How We Will Calculate Your Balance" in the cardholder agreement.

Transaction Limit

Transaction limits are the maximum amount allowed for a single transaction. In most cases, the card issuer sets a default transaction limit that the cardholder can modify in his/her card settings.

Transaction limits provide additional control over fraudulent activities. Some neobanks such as Petal use them as a way to accept borrowers with subprime credit but mitigate the risk of irresponsible use.

Cardholder Agreement

The cardholder agreement is a standardized document that includes the Schumer Box and explanations of each segment, their costs, and calculation methodologies. It is the legal contract that governs all of the card's activity.

That said, some deposit accounts and rewards programs included with credit cards are governed by separate documents, so consumers should ensure they collect and read all paperwork associated with their credit card.

Common Features

In addition to fraud-protection, credit cards offer 3 usability features that support ease-of-use and security, notably contactless payments, digital cards, and security codes.

Contactless Payment via Chip

Chip-secured payments allow consumers to pay without swiping or inserting their credit card. Contactless payments make checkout faster and more seamless. The technology used, called Radio Frequency Identification (RFID), also secures the transaction with one-time codes.

Moreover, contactless payment prevents criminals from stealing credit card information with card skimmers. Skimmers rely on magnetic band weaknesses to copy and steal card details, which is not a problem with RFID technology.

There are, however, a few disadvantages. The first is that chips can be read from a short distance, and criminals can scan your card for a payment while it's in your pocket. This risk is why consumers should generally hold credit cards in a RFID-blocking wallet or purse.

Additionally, contactless payment can lead to higher spending for some consumers. On average, however, the impact is limited.

Physical & Digital

Credit cards are physical plastic or metal consumer hold in their wallet, but neobanks and traditional banks provide virtual cards that customers can store in smart phone applications such as Apple Wallet and Google Wallet.

The obvious advantage of digital cards is that consumers no longer need to carry a physical card, which means one less thing to carry and remember.

Additionally, digital cards add an additional layer of security because they require facial recognition, fingerprint recognition, or passwords to authorize a transaction.

Security Code (CSC or CVV) & Card Number

Card Security Codes (CSC), also known as Card Verification Values (CVV), are 3-digit codes on the back of credit cards.

They enable safe payments in card-not-present transactions, which refers to any scenario where the cardholder cannot enter his/her personal identification number (PIN). The most common use case is online purchases.

Security codes create an additional level of verification that protects against fraud.

Odds of Approval

The average credit card approval rate is 80% in 2023 and has historically been slightly higher at 82%. The chart below shows approval rates since October 2013 based on data from the United States Federal Reserve's Consumer Expectations Survey².

Credit Limits

The average approved credit limit is $6,263 and the average partially approved limit is $3,689 based on data from the Consumer Expectations Survey².

This means borrowers have an average of approximately $6,000 in revolving credit they can use for purchases each month.


Credit cards are unsecured by default, but a subcategory is secured.


Unsecured credit cards are the same as normal credit cards. The lender provides a credit limit without any cash or physical collateral requirements. That said, credit cards are recourse debt. This means lenders can pursue borrower collateral through legal channels in the case of non-payment.


Secured credit cards require the borrower provide cash collateral up front. This means consumers must deposit cash into a locked deposit that can be confiscated in the case they don't pay back used credit. Secured cards charge high interest rates despite the collateral.

Though they are inconvenient and expensive, secured cards are a credit builder product because they accept borrowers with subprime credit. Consumers with below average credit have an alternative in credit builder cards.

Consumer vs Business

Credit cards are available to both consumers and businesses. They function in the same way, with a notable difference in credit limits. Business credit cards have higher limits to support the working capital needs of company activity.

Moreover, the responsibility business credit cards does not fall back on the owner as long as the structure is not a sole-proprietorship. This is called limited liability and its corporate veil.Consumers, however, are always responsible for the debts on their credit cards.

Credit Card vs Debit Card

Credit cards are not the same as debit cards. Confusion arises from the presence card network brands (see next section), such as VISA® and MasterCard®, on both types. Networks facilitate underlying bank-to-bank transactions but do not hold or lend money.

The key difference is that purchases on credit cards generate a debt that cardholders must repay ~21 days after the billing cycle ends (or earlier) to avoid interest, whereas purchases on debt cards are directly deposited from the cardholders checking account and create debt or incur interest.

Card Networks

Below is a list of 6 major card networks around the world.

  • Discover (Global)
  • VISA (Global)
  • MasterCard (Global)
  • American Express (Global)
  • JCB (Japan)
  • UnionPay (China)

Credit Card vs Charge Card

Charge cards are a type of credit card that do not allow the cardholder to carry a balance or incur interest. Instead, they simply block all card activity until the cardholder pays his/her debts.

Charge cards are less common today. American Express offers several, and the Tomo credit builder card is the last charge card available to the masses.

Target Markets

Several markets stand out for credit card usage. The notable exclusion is Europe. Due to regulations and a fragmented technical infrastructure, credit cards are not available in the European Union.

  • United States. The United States is the largest credit card economy after China.
  • United Kingdom. The UK allows consumers to borrow money with credit cards.
  • Canada. Canada joins the US in most respects for credit cards.
  • China (UnionPay). With some differences, UnionPay is a card network, payment processor, and credit card issuer that controls the entire Chinese market.
  • Japan (JCB Co., Ltd., formerly Japan Credit Bureau). Japan accepts most credit cards from around the world and has its own issuer, JCB.


  1. “Federal Reserve’s Survey of Consumer Finances Dataset.” n.d. Accessed April 17, 2024.
  2. “Federal Reserve of New York’s Consumer Expectations Dataset.” n.d. Accessed April 17, 2024.
  3. “Federal Reserve’s Consumer Credit Dataset.” n.d.

Nice to Know, Thanks

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If you want this stuff, why wait?
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About the Author

Noah Gomez (founder of Thick Credit) is a transatlantic professional and entrepreneur with 3+ years experience in consumer finance education. He also has 5+ years of experience in corporate finance, including debt financing, M&A, listing preparation, US GAAP and IFRS.

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