For people with very bad credit scores, or a very thin credit file, they can get a secured card. They deposit with the credit card issuer funds equal to the amount they can spend each month. That protects the issuer against their inability to pay. These tend to have low maximums.
For the majority of credit cards used are a regular card. The issuer looks at their income, credit history, credit score and the other debts they have to determine the credit limit.
For example they determine the user can have a credit limit of $3000. That means that they can spend a maximum of 3000. When they hit 3000 they risk getting the transaction rejected at the store, or website, for going over the limit. Every month they are sent a bill, and given a maximum of 3 weeks to pay that bill.
If they pay the bill in full every month, they will never owe interest. There is a minimum amount they have to pay, 4% of the bill each month, or they risk damaging their credit score.
Any balance they don't pay causes interest charges to start. They will continue to accumulate as you buy more stuff, and as the days go by before the entire bill is paid. Keep in mind that the $3000 limit is a maximum you can owe at any time. You must pay it down to continue to use the card.
Benefits:
- The use of the credit card doesn't cause daily reductions in your checking account. A Debit card instantly draws down the checking account.
- You can spend money at a store before you have the money in the bank. You can make that purchase the day before pay day because the bill may still be weeks away. With a debit card you risk overdrawing your account multiple times for overspending.
- Proper use increases your credit score, and allows the company to increase your credit limits.
Risks:
- Both types of cards have risks. Both can destroy your finances if you go crazy.
- Both have fees that can drive the cost up if you don't use it wisely.
Credit cards and debit cards are completely different in timing of collection of funds. If the credit card bill is paid each month there never is an interest charge.
Note: this answer doesn't cover psychology of spending with credit cards, what fees are acceptable, airline miles, cash back cards...