Are you ready to get your first credit card?
Credit cards are very useful tools and have a lot of advantages if you know how to use it correctly. They can build your credit, enable you to earn points and rewards and manage your expenses easily and effectively. However, in order to avoid credit card mistakes and take advantage of the benefits, it's better to understand how a credit card works , what's their main features and which things you have to keep in mind.
Below is key information you need to know about credit cards that will steer you in the right direction.
1. Why Do I Need Credit Card?
The most important aspect of credit cards is that they help you build credit. By having good credit, you’re in a position to qualify for future loans such as a mortgage loan with great rates.
In addition, having good credit can also position you to get an apartment or your own mobile phone plan. You’ll also be able to avoid utility deposits and qualify for lower insurance premiums.
Lenders apply other benefits as well; credit-building is not the only one. A lot of credit cards offer travel or cash back rewards that range from 0.75% and 2.5% of qualifying purchases. Moreover, there are cards available that offer shopping or travel benefits that can save you a lot. For example, you can save on purchase protection, price protection, extended warranty, rental car, insurance, etc. Credits companies also offer no interest (0%) on purchases or balance transfers for the initial 12 to 18 months. When your credit card arrives in the mail, check out the card information for additional details.
2. The Idea Of Credit Cards
Let’s go over the basics. When you purchase an item with a credit card, you’re actually buying it later. This method of buying is different from a debit card, which takes out the money immediately after using it. Now back to credit cards, instead of paying the store, you have to pay the lender, which gave you the money to purchase your items.
Furthermore, a major benefit of having a credit card is that the issuer offers security benefits such as unauthorized charge protection if you become a victim of fraud. Most credit cards nowadays are chip-enabled. This aids in minimizing fraud by converting your card information into a unique code through an embedded microchip. As a result, it’s more difficult to duplicate.
Even though you may already have some knowledge about credit cards, there may be additional information that you don't know about that you can benefit from knowing.
3. The Benefits Of Authorized Credit Card User
If you become an authorized user on another person’s account, you have the benefit of using the card without having to worry about paying the bill. Moreover, if you don’t have much of a credit history, becoming an authorized user empowers you to build credit because what is spent may be reported on your credit report and increase your chances to get a credit card without a credit history.
You can also benefit if you have bad credit as well. One thing to consider is that the person that’s responsible for the bill needs to make their payments on time. This is important because negative reporting will affect your credit score as well.
4. Card Types, Issuers and Brands
The average American is familiar with the major credit card brands such as Visa, MasterCard, American Express and Discover. Any credit card from local credit unions or banks will have either one of these brand networks. Most store locations will have a post that shows what card brand they accept.
Even though these major brands are widely accepted in the U.S., you still may run into stores that may not accept American Express or Discover. A lot of stores accept Visa and MasterCard; even on an international level. Credit card issuers typically list the brand on the actual credit card.
Banks, such as Chase or Citibank, typically issue credit cards. These banks offer a wide variety of credit cards. Student credit cards cater towards college students. Cards that are secure are for people who desire to build up their credit history. Rewards cards allow cardholders to earn cash-back, airline miles, or points on your spending. Premium type cards come with even more benefits but they typically have an annual fee.
Moreover, stores and retailers also have their own cards that you can receive discounts and rewards exclusively at their store. This is why it’s important for you to know the type of card you have so you can capitalize on the benefits and rewards they offer.
5. What is APR (Annual Percentage Rate)?
APR is the interest rate that issuers charge on your outstanding balances. If your balance carries over into the next billing cycle, the issuer will charge you interest based on your APR.
Getting a low APR is what you want. This also goes for individuals who don’t even carry a balance month-to-month. Moreover, it’ best to look for a watch out for introductory offers because they advertise a very low APR, such as 0%, that lasts only for a certain time period before it shoots up. It’s best to know if the number you see is permanent. If not, mark the date your calendar of when the introductory period expires. That way, you won’t be caught off guard later on when you see an interest charge.
6. How Credit Card Interest is Calculated
Most people believe that credit card companies place the interest on the card balance after the payment due date. If you don’t pay your balance off in full, you’ll build up interest on your balance during the month.
Let’s say for instance that you have a $2,000 card balance. After you accrue interest on day 11, you pay off $700. On day 21 of accruing interest, you pay off an additional $400. Your average daily balance totals out to $1,400 (2,000 * 1/3 + 1300 * 1/3 + 900 * 1/3).
If the card’s APR is 15%, the periodic interest rate is 0.041%. You calculate the periodic interest rate by dividing your APR by 365. Moreover, you have to multiply your average daily balance by the periodic interest rate and the number of days in the month to know the amount of interest accrued in the month. In this case, for instance, it comes out to $57.53.
The only way to avoid interest charges is to pay off your balance in full each month. Paying only the minimum will keep you in good standing, but paying interest is totally unnecessary if you spend according to what you can afford.
7. Credit Limit and Balance
One of the main things you need to initially about your credit card is its credit limit. Your credit limit is the maximum dollar amount of you can charge to your card. Depending on your card’s rules and guidelines, once you reach the limit, you won’t be able to charge more. If you can, you’ll have to pay an over limit fee. For instance, let’s say that your new credit has a limit of $2,000.
If you charge $500 at GYM, you’ll have $1,500 left to use. The $500 would be your current balance that you’ll have to pay back when you get your card statement.
8. The Difference Between Secured to Unsecured Credit Card
Trying to get a credit card for the first time can be quite a challenge. You have to have a credit card in order to build credit, and at the same time, you need credit to get a credit card. Do you see the dilemma here? If you find yourself caught between the two, look into getting a secured credit card.
These types of cards require you to place a cash deposit that’s typically equal to the card’s limit. The money is used as collateral if you don’t make your payments. More, it acts as a regular credit card because you have to make on-time monthly payments. The deposit, in this case, is simply a safety net. After the credit card sees you’ve been using your secured card responsibly, you can transition to an unsecured card and receive your deposit back.
9. Age Limitations
Normally, you have to be at least 18 years of age to apply for a credit card. Being under the age of 21, for instance, the lender requires you to show proof of income or assets that show that you will are able to repay the amount you charge.
If you aren’t able to provide this information, your parents or another adult will have to make you an authorized user on their account.
If you’re a college student with a part-time job, you may have enough income to meet the requirements of getting a student credit card. Above all, it’s imperative that you know that you’ll have full responsibility of paying your bill each month.
10. Credit Card Impacts on Your Credit Score
Your credit score and history is simply a record of your behavior as a borrower. It shows the lender how well you are able to manage your credit cards along with any other debts you may have. Having a good credit score is essential to having a successful financial future. It also determines whether or not you’ll be able to future cards at competitive rates.
Owning a credit card and using it wisely positions you to have a healthy credit score and record.
Moreover, you can achieve this by paying your bill on time each month and staying within your credit limit. This shows that you are a responsible borrower. Here you can find more tips on how to establish your credit.
Having a credit card is a great way to help you manage your money as well as prioritize your budget. You can avoid overspending by making a purchase that you know you can afford to make.
Also, paying off the balance each month is another way to prevent overspending. Signing up to receive email and text notifications will ensure that you won’t miss a payment. Enrolling in automatic bill-pay is a great way to make sure your bill is paid on time. Overall, paying your bill on time is important to establish a good credit history.