What is a credit card?

If you're like most Americans, you probably have at least one credit card in your wallet. But many might not know how they work, exactly.

Each credit card comes with its own limit, usually of a few thousand dollars or more. You can therefore charge any amount up to that level, and you will be charged interest only if you don't pay your balance off in full by the end of each billing period. Interest rates on credit cards are usually much higher than those on standard loan types.

You can also add to and subtract from your balance every month depending upon how much you spend on the card and pay into the debt. But in general, a good rule of thumb is to try to avoid owing more than, say, 30 percent of your limit, and to make payments of well above the minimum listed each month to avoid getting into too much debt or hurting your credit score.