A credit card is a plastic card that allows you to borrow money from a lender. The credit limit is the maximum amount of money you can borrow at any time. When you use your credit card to purchase, the credit card company pays the vendor for you. You will then need to pay back the loan plus interest and fees.
There are a few things you should keep in mind when using a credit card:
- Make sure you can afford to pay back the loan plus interest and fees.
- Don’t use your credit card for everyday expenses, like groceries or gas. Only use it for emergencies or purchases you can afford to pay off over time.
- Don’t pay the minimum payment. Paying just the minimum amount can take you years to repay your loan and rack up hefty interest fees in the process.
- Avoid cash advances or withdrawals that could cause additional charges, like an overdraft fee on your checking account if you don’t have enough money for purchase during check out.
- onitor your credit score and credit utilization. Keeping an eye on these factors can help you stay in good standing with your lender.
How Credit Cards Work
Credit cards work by providing a line of credit to consumers. When a purchase is made, the credit card company pays the vendor for you. The consumer then owes the credit card company back the loan amount plus interest and fees.
Credit cards come with a credit limit. This is the maximum amount of money you can borrow at any time. When making purchases, you should be aware that most cards charge interest on unpaid balances starting from the date of purchase (not until payment has been received). That means if your minimum monthly payments are not enough to cover the interest accrued each month, it will take longer to pay off your balance.
Most credit cards come with a set APR or annual percentage rate. This is how much interest will be charged on the loan balance each year. The APR can vary depending on the credit card company, your credit score, and other factors.
Credit cardholders are also subject to late payment charges if they do not pay the minimum monthly payments on time. Keep in mind that some credit cards charge higher interest rates for cash advances and balance transfers, depending on the issuer.
Any payment done using the card shows up as pending on your account. The money won’t hit your account until the next day, which is when the billing cycle starts. Your account balance increases once the transaction is completed.
Most credit cards give grace periods, where you won’t incur interest charges on your balance as long as you pay it by the due date each month. If a payment is late, you will be charged interest from that date forward and no more grace period applies to making up for missed payments.
Misconceptions of Credit Cards
1. Paying all your balance makes you debt-free
This isn’t always the case. When you carry a balance over from month to month, you’re charged interest on that amount. So even if you managed to pay off your card in full one month, if you still have a balance carried over from previous months, then you’ll be charged interest on that amount. To avoid accruing interest, make sure to pay your balance in full every month.
2. Paying the minimum amount due is enough
Minimum payments are designed to cover only the interest accrued on your card, not the principal or original loan amount. That means if you only pay the minimum each month, it will take longer to pay off your balance, and you’ll end up paying more in interest.
3. Closing all credits cards deletes credit history
Closing your credit card account will not delete the history associated with that account. Closing an account can impact your overall credit score by lowering your available credit to use, which means you’ll have less access to borrowing money should you need it in the future.
4. Maximum credit is not enough
Some people prefer to have a large limit on their card, so they don’t need another one. If you’re using your card responsibly and making regular payments, having more available credit can be useful in some cases like emergencies or travel plans. However, if you find it hard to keep track of all the charges made on your card, then consider switching to a lower credit limit.
5. It’s a good idea to use your card for everyday expenses
Charging small purchases to your credit card can be convenient, but it can also lead to overspending. If you’re not careful, those small charges can quickly add up and make it harder to pay off your balance in full. Try only using your card for larger purchases that you can afford to pay off in full each month.
6. All interest rates are the same
The interest rate on your credit card can vary depending on several factors, such as your financial history and the type of card you’re using. You may be able to get a lower or even no-interest introductory offer if you’ve been approved for an account with good terms. However, new offers usually come at higher rates than your original rate, so you’ll need to pay attention to the fine print.
7. You should close all accounts with zero balances
Closing unused accounts can hurt your credit score. If you have multiple cards and only use one or two, it looks like you’re not using them responsibly and could be a higher risk for lenders. It’s better to keep all of your accounts open, as long as you’re using them responsibly and paying the monthly minimums on time
8. Having more credit cards increases your credit score
Having more accounts can lower your average age, which plays a larger role in your overall credit health than the number of cards you have. Closing an older card could give you a slight boost but will not make as much of an impact on your score as keeping an old open account increases its length and gives it time to impact your credit utilization positively.
Facts About Credit Cards
1. Don’t close all your accounts with zero balances.
2. All interest rates are not the same on credit cards, and choosing a lower rate can help you pay off debt more quickly.
3. Having many credit cards does not decrease your score. It can have the opposite effect.
4. Paying the minimum balance due on your credit card is not enough. You must pay your balance in full every month.
5. Closing an older credit card will not impact your score as much as keeping it open. Using it responsibly will help boost its length and positively affect your credit utilization.
6. Charging small purchases to a credit card can be convenient, but doing so regularly can lead to overspending.
How To Build Credit
1. Make sure your credit card is activated.
You must first activate the account before using it and receive a letter or phone call from the issuer confirming that this has been completed successfully.
2. Use a secured card
A secured card requires that you put down a deposit, which becomes your credit limit. This helps reduce the risk for the issuer and usually comes with lower interest rates.
3. Use your card responsibly.
Using a credit card regularly and paying the monthly minimums will help build your score over time, making it easier to get future cards with better terms.
4. Monitor credit scores and reports.
You can get a free credit score from several sources, like Credit Karma or NerdWallet, and you should review your credit reports at least once a year to make sure all the information is correct.
5. Get credit for payments made on time.
Your credit score is also based on your payment history, so make sure to pay all bills on time, including your credit card statement.
Written by Taylor McKnight, Author for Compare Credit.
Read Next Blog: An Advisor for All Your Finances!
