If you’re looking for your first credit card, it’s critical to understand how they work and how to use them to your advantage. See the details for yourself!
Overview of Credit Cards
Obtaining a credit card offers benefits. Using a credit card to make purchases is handy, and some even give you points for your transactions.
A credit card can also be a useful instrument for establishing a good credit history.
Credit cards present profitable chances to accrue financial incentives and establish credit. However, if misused, they might result in overwhelming debt.
The ideal method to utilize a credit card is to pay off the debt in full each month on time to avoid paying interest.
For the majority of credit cards, interest rates—also referred to as Annual Percentage Rates, or APRs—apply to purchases, cash advances, and debt transfers.
Although most credit card users prefer to avoid paying interest whenever feasible, there are a few crucial considerations to remember when using a credit card.
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How Credit Cards Work
You can make purchases using a credit card and pay for them later. It is comparable to a short-term loan in that regard.
In essence, you are spending the credit card company’s money when you make a transaction with one of their cards.
Afterward, you return the funds to the credit card company, either with interest or not, based on when you make your payment.
You have a credit limit set by your credit card issuer that you have to adhere to when making purchases. Your credit score, income, and account history are just a few of the factors that will determine this cap.
Your available credit decreases as you charge transactions to your card. Once you pay off your bill, you restore your credit availability.
Every month, your credit card provider gives you a statement that includes information about all of your transactions, balance, minimum payment, and due date.
Reading Your Credit Card Statement
You will receive a statement detailing the activity on your account each month. This assertion consists of:
- Your entire credit limit.
- Your credit limit as of right now.
- purchases you completed within the billing cycle of that statement.
- The minimum amount owed.
- Date of payment due.
The least amount you have to pay for that month is the minimum payment due. However, if you can, it’s usually a good idea to pay more than the minimum.
You can also find out how much it will cost you to pay off the balance over time with interest by consulting your card statement.
If you pay your credit card account in full during the grace period, interest rates on outstanding balances can be avoided.
A credit card grace period is a predetermined window of time, usually 20 to 30 days, during which you must settle outstanding balances before interest begins to accrue.
Interest starts to accrue if you don’t make the entire payment. The annual percentage rate (APR) on your card will decide how much interest you pay.
The annual percentage rate (APR) is a percentage that represents the interest rate and any fees levied by the card.
How to Use a Credit Card
Using a credit card is simple. For example, when you go into a business, you can be asked to swipe or enter your card into a chip reader at the register.
For contactless payments in stores, you can also link your card to digital wallet applications. Using your credit card to make an online purchase requires providing your card details, which include:
- The card’s number
- The date of expiration
- The CVV security code on your card is usually printed on the back.
The credit card company, the retailer, and the card network (like Visa or Mastercard) work together to authorize and process the payment when you use your card to make a purchase.
This is all completed electronically and almost immediately.
Additionally, it’s critical to utilize your credit card in a way that will improve your score without adding unnecessary fees or interest to your expenses. For instance:
1. Pay Your Bill on Time
A number of criteria go into determining your credit score, but the most significant one is your payment history.
While making late or no payments at all can negatively impact your credit score, paying your obligations on schedule can help it.
Making sure you pay your credit card bills on time each month is the first rule of credit card usage.
To reduce the chance of paying late, you can arrange for automatic payments from your bank account or set up credit card account due date reminders.
2. Know How Your Card’s Interest Is Calculated
If you carry a balance on your credit card from month to month, interest charges have the potential to increase the cost of everything you buy.
Make sure you comprehend the annual percentage rate (APR) and how interest is charged on purchases when you open a credit card account.
Recall that during the grace period, you can pay off purchases interest-free. Additionally, be advised that your payments may be applied differently if you have balances with varying interest rates.
Let’s take an example where you have two balances, one at the standard purchase APR and the other at the promotional 0% APR.
The balance with the highest APR would be charged first for any amount you pay beyond the minimum.
3. Watch Out for Credit Card Fees
The expense of using credit cards is further increased by the various fees they may incur. Among the most typical costs you could run into are:
- Annual charges
- Fees for international transactions
- Transfer fees for balances
- Advance fees in cash
- Late fines for payments
- costs for returned payments
You should find a list of all these fees in your card agreement along with the APRs for the card. Prior to applying, you can research them online as well.
When choosing a credit card, evaluate the annual cost against any potential value the card may provide in the form of rewards or other perks. There are numerous cards that don’t have annual fees.
In a similar vein, you might wish to choose a card that waives foreign transaction fees if you intend to travel.
4. Keep an Eye on Your Balance
Your credit usage ratio is the second most significant element influencing your credit score, behind your payment history.
It calculates the percentage of your credit that is available for use at any given time. Keep your card balance low compared to your credit limit in general.
In addition to potentially lowering your credit score, maxing up your credit cards can indicate to lenders that you might be a higher-risk borrower.
The idea that having a balance on your credit card can raise your credit score is a prevalent one. Conversely, if having a balance indicates that you are utilizing more of your available credit, it may lower your score.
By charging a little more than you can afford to pay in full each month, you can improve your credit score and save money.
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The Bottom Line
Although credit cards, including secured credit cards, can be beneficial in establishing credit, improper usage of them can also be detrimental.
Make sure you know how much interest and fees will cost you when comparing credit cards, as well as the benefits of any incentives and other features.
Once you start using a credit card, be sure your account activity is accurately reported by routinely checking your free credit reports.
In the event that your card is ever lost or stolen, it can also be a useful method of identifying possible fraud or identity theft.
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