How do credit cards work?

You likely already know what a credit card is: A plastic (or sometimes metal) card that you can swipe in order to borrow money from a lender (typically a bank or credit card company) in order to make a purchase. You can think of a credit card a lot like a loan that you can use to pay for whatever you like.

In a nutshell, credit cards work like this: So long as you pay off your balance before the end of the payment period, you will not be charged any money for using your card, outside your annual fees. But if you fail to pay off your balance before the period ends, you will be charged an interest rate (or APR) on top of this.

The average credit card carries an interest rate of 19.24 percent, but that figure can vary significantly depending on your credit score and other factors, from as low as 10 or 12 percent to more than 30 percent. (That’s why it’s so important to avoid racking up credit-card charges that you can’t afford to pay back immediately.)

How to get a credit card

Step 1: Understand why you want one

Before you start the process of applying for any card, you need to understand your own personal motivations for wanting one, because your answer to this question will shape much of the rest of your search.

So ask yourself:

  • Do you want a credit card to start building credit?

  • Do you want access to a certain kind of rewards program, like a cash-back system or an airport miles card?

  • Are you considering signing up for a card with a retailer in order to save money on a major purchase you need to make (like a refrigerator or other appliance)?

  • Do you want to open a new card that is offering a low APR for balance transfers so that you can consolidate other debt and pay it off more cheaply?

  • Or is it something else entirely?

Once you know what you hope to get out of having a credit card, you will be much better prepared to identify cards that fit with your goals—and just as importantly, disqualify those that don’t.

Step 2: Check your credit reports

Ultimately, whether or not you are approved for a credit card, and the interest rate you’ll be charged, will depend in large part on your credit score and the information found in your credit reports. That’s why, to avoid any nasty surprises during the application process, it’s a smart idea to review your credit reports for yourself.

There are a number of free online services (like Credit Karma, Credit Sesame, or that allow you to check your credit score extremely quickly—typically in a matter of minutes—which can give you a basic idea of how your credit is looking.

Ultimately, though, you should request your full credit report from each of the three major credit bureaus in order to see exactly what is on your report and what factors are impacting your score. Regularly reviewing your full reports can have a number of benefits, potentially enabling you to identify and remove errors from your report that could cost you thousands of dollars in higher interest rates.

Don’t like what you see? There are many steps that you can take to improve your credit score before you apply for a credit card, in order to increase the likelihood of being approved and getting the best possible interest rates that you can qualify for.

Step 3: Compare your options

After you are certain that your credit report is accurate and that your credit score is as high as possible, you can begin comparing your options to find the right card for you.

Just as you wouldn’t buy the first car you lay your eyes on, you shouldn’t sign up for the first credit card offer that you stumble upon. You need to do your research to make sure that you’re choosing a credit card that will help you reach your goals, while also being as inexpensive as possible.

While everyone’s requirements for a card will be unique, some factors you should consider are:

  • Does the card offer you an interest rate that is fair for someone with your credit score, or can you find a better rate elsewhere?

  • Does the card offer a rewards program (or other benefits) that are important to you?

  • Does the card carry significant annual fees that will eat into the value of these rewards?

While you can compare your options manually on your own, there are many websites specifically designed to help you compare your credit card options and find the card that is best for you. Nerdwallet and Bankrate are two of the most popular.

Step 4: Understand what you’re signing up for

When you apply for a credit card, you give the credit card company permission to conduct a hard credit pull (or inquiry) to evaluate your credit history. Too many hard inquiries in a short window of time can have a negative impact on your credit score, so you want to limit the number of applications you submit. Find the card that meets as many of your requirements and apply to that card first; if you are denied, then you can consider applying for a different card.

It is also important to keep in mind that every credit card comes with its own unique set of terms and conditions, which you should carefully review before submitting your application or ultimately signing up for a card. Even two different cards offered by the same company can have different contract terms, so never make any assumptions.

Some of the most important terms and conditions to note include:

  • The APR

  • Any fees that you will be expected to pay

  • The credit limit

  • Promotional terms (such as low introductory rates)

  • Rewards programs

  • Repayment options

  • Fraud protection

Step 5. Complete the application

Once you are certain that a particular card is right for you, you should go ahead and pre-apply for the card online. This quick process will tell you whether or not you will qualify for the card and what you can expect your interest rate to be, and is based off of information found in your credit score. It requires a soft pull (or inquiry), which will not impact your credit score.

If you are pre-approved, you can go on to fill out the application. You can usually do this online, though occasionally you might choose to do so in person at a bank or by mailing in an application form. As mentioned above, this will trigger a hard credit pull which can have a small impact on your credit score.

While the information you will need to complete the application may vary slightly from lender to lender, you will generally need to provide your:

  • Name

  • Address

  • Date of Birth

  • Social Security Number (SSN) or proof of citizenship

  • Employment Information (and proof of employment)

  • Income

If you submit the application virtually, you can often receive a decision back immediately. If you are approved and accept the terms of the card, you will usually receive your physical card within two weeks. If you are denied, there may be steps that you can take to improve your credit score and try again in the future.

Once you have your credit card, your next step should be to continuously practice good credit habits. Do your best to avoid carrying a balance from one period into the next, in order to avoid interest charges. Never spend more than you can afford. And build and rely on an emergency savings fund for emergencies instead of credit cards. Finally, don’t close your old credit card accounts unless you absolutely need to, as this can negatively impact your credit score.

This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.