How credit cards work

A credit card also gives you access to a revolving credit line. Your card will have a credit limit — the highest your balance can go before the card issuer starts declining your transactions.

During your billing period, purchases, balance transfers, fees, interest charges and other transactions can increase your balance. When your billing period ends, the card issuer will send your credit card statement with a summary of your transactions, your current balance and your required minimum payment. Your next billing period will begin right away, although the bill you just received generally won’t be due for another 21 to 25 days.

If you continually pay the entire balance on your credit card statement and your card has a grace period (as many do), then you won’t have to pay any interest on your purchases.

However, you can pay less than your entire balance, all the way down to a minimum payment — which may be just $15 to $30 depending on your card and balance. If you pay less than the full amount, then the unpaid portion will be carried over to the next month and start to accrue interest. Additionally, any new purchases will begin to accrue interest immediately.

When to use a credit card (and when not to)

A credit card could be a good option for making regular purchases. You may have over 50 days from the start of your billing period to your bill’s due date, which gives you some flexibility to manage your cash flow. You also won’t pay interest on your purchases if you can pay your bill in full each month. You could even earn rewards with your purchases, such as cash back or points in travel loyalty programs.

There are also promotional rate and balance transfer credit cards that offer a temporary 0% interest rate on new purchases or balances that you transfer to the card. Using one of these offers could help you finance a large purchase interest-free, or transfer and pay down debts without accruing interest.

However, getting the most out of credit cards require financial and personal discipline, and might not be possible for someone who is struggling to stay on top of monthly bills.

Falling behind and making a less-than-full payment can lead to your balance accruing daily interest at a potentially high-interest rate. Even the promotional rates can eventually turn into a high rate, and if you’re unable to follow through with a plan to pay off the balance you could be left with a large high-interest debt.

For those who tend to make impulse purchases, even the best-intentioned plans could come crashing down. If you have several credit cards with a balance and then transfer the balances onto a zero-interest balance transfer card, you’ll now have multiple cards with an available credit limit. Max those out and you could be faced with even more credit card debt than you had at the beginning.

Bottom line

Credit cards and lines of credit are both revolving accounts, but they may be best used in different circumstances.

A credit card can be best for day-to-day purchases if you can afford to pay the bill in full each month. Additionally, using promotional rates and offers could sometimes save you money. However, credit cards’ high-interest rates can make paying off credit card debt difficult once you start revolving a balance.

A line of credit could be helpful if you have a series of upcoming expenses to finance, or if you want to open an account that you can tap during emergencies. But beware of minimum and maximum draw amounts and your overall cost if you don’t have a fixed repayment term for your draw.

No matter which type of account you want to open, always compare your options first. Both credit cards and personal lines of credit may offer different interest rates, terms and fees depending on the creditor, and you want to find the best fit possible.