Credit cards are used by billions of people around the world. They offer many benefits, are convenient, and easy to use. There are credit cards with various perks, including travel, dining/entertainment, and other attractive point/cash-back options.
However credit cards can be intimidating, they can have high-interest rates, and can comprise a large part of personal debt. It can be confusing to understand the terms and conditions with all the different vocabulary.
What should you use credit cards on? What do you need to know about interest rates? What do you need to know about credit cards? What to do/what not to do? We’ll walk you through credit card basics and help you feel more comfortable with using credit.
Credit Cards 101: Introduction
First, a quick background and some terms to familiarize yourself with:
Credit cards are a secure and convenient way of spending money that doesn’t involve cash. With the growth of online purchases due to COVID-19, they are now becoming even more popular for purchases.
Many credit card companies offer points, reward programs, sign-up incentives, and/or attractive APR offers. When done correctly, you can use credit cards to your advantage.
For more information about different credit cards and their benefits, NerdWallet reviewed some of the best credit cards of 2021.
Credit Card Terms to Know
- Annual fee: what cardholders are charged on a yearly basis simply for having the card.
- Most introductory cards don’t have annual fees (Citi Double Cash,) and some cards can have annual fees of up to $5,000 (American Express Centurion Card)
- APR (Annual Percentage Rate): the interest rate you pay on balance that you carry from month to month
- Pay attention to cards that charge different rates on different types of balances (cash advances, balance transfers, purchases, etc)
- Foreign transaction fees: fees you incur if you’re using your card outside of the U.S. (usually 3% fee)
- Late fees: incurred when you pay late or when you don’t pay the minimum amount due
- Secured card: credit cards that require a security deposit to open the account
When To Use Credit Cards
- If you’re going to purchase something and will pay it back before the end of the billing cycle.
- If you’re churning- the art of squeezing all the benefits out of a credit card (sign-up bonus, points, etc)
Points can be an effective way to churn, but if you’re not able to develop self-control and pay off your purchases immediately, it can be dangerous. This can lead to a cycle of forgetting about the payments and accruing credit cart interest and potentially debt.
There’s no point in getting points if you’re going to let your balance carryover. These actions would cancel each other out and waste your time and energy.
It’s easy to use points as an excuse and incentive to buy something you normally wouldn’t. But remember that if you can’t afford those purchases, the points will be useless.
Important Things to Know for Credit Card Owners
Pay More Than the Minimum Payment Due
Your credit card statement will tell you your minimum payment due, and you will often see that very clearly labeled on your credit card app.
You may be tempted to only pay that minimum amount due, but remember that paying less now typically means paying more in the future. You’ll have to pay off the interest on the balance and any additional purchases.
Know Your Credit Limit
Credit limits are the max you can purchase on your card before fees and penalty rates are charged. Make sure to stay below your credit limit and don’t let your outstanding balance be too close to your credit limit.
Check Your Credit
Credit scores range between 300 and 850, and one of the most common scores are FICO and VantageScore.
Credit is impacted by:
- Payment history: making on-time payments
- Credit usage: how many of your accounts have balances, how much is owed, and how much of your credit limit you’re using
- Credit mix: looks at installment accounts (car or personal loans) and revolving accounts (credit cards)
- Recent activity: looks at whether you’ve recently opened up new accounts
It’s important to check your credit score to keep tabs on where you’re at, and on ways to improve your score.
Check your credit score here:
Only Use Credit Cards When They Would Benefit You
Remember that the way credit card companies make money is through interest. They want you to carry over your balance and pay that absurdly high interest rate. You don’t have to pay credit card fees! They’re avoidable as long as you navigate away from late fees, foreign transaction fees, and charges related to balance transfers.
Biggest Credit Card Mistakes
Spend What You Don’t Have
Assuming you have credit available, credit cards give you a fast and highly liquid influx of cash. It’s easy to access and use, but the largest point to note is that you should only use credit cards if you have the funds to pay them back.
Simply put, if you don’t have the money available now or before the next billing cycle, you should not use credit for purchases. Credit cards are not debit cards, and shouldn’t be used as such.
Why? Interest rates are extremely high on credit cards. If you can avoid paying approximately 16% interest on credit cards, you can save yourself potentially hundreds to thousands of dollars.
Use Credit Cards as an Emergency Fund
Do not use credit cards as an emergency fund, especially if a credit card is your plan A for an emergency.
- However, there’s always an exception to the rule. If you’re using that credit card for an emergency with the full ability to pay off that card, then that’s a good idea.
Apply For Too Many Credit Cards at Once
When you apply for a credit card, each application could hurt your credit score. Only apply for credit cards when you need to.
Credit cards can be an extremely useful tool and if you remember to make your balance payments, avoid accruing interest, and most importantly don’t spend more than you have, you will increase your credit score, earn points and cashback, and make money by spending money.
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