Having a credit card is great for a multitude of reasons, from helping you establish and rebuild credit, to giving you a financial boost when you need it.
Generally, it’s agreed that credit cards are a worthwhile investment.
The main drawback of a credit card is that it can be confusing—whether you’re just getting your first card or you’ve had a credit card for a while. There are a lot of terms, rules, and best practices that you have to learn on your own. This can deter people from getting credit cards and leave them wondering if credit cards are worth the perceived hassle.
The truth is, credit cards don’t have to be tricky to understand, and they don’t have to cause financial problems as long as you do your research and use your credit card wisely. In this comprehensive guide, we’re going to explore everything you need to know about selecting, applying for, and using a credit card so that you can make the most of it.
What Is a Credit Card?
Starting very simply, let’s go over what a credit card actually is. They are a payment card that is usually issued by a bank or one of the major credit card issuers like American Express. Even credit cards that you can get at a retail store are always backed by a bank. Credit cards are also different from debit cards, prepaid cards, and gift cards.
Credit cards allow you to pay for goods or services without spending any of your actual money upfront. Instead, you are billed for those purchases at the end of every month. You can pay your entire bill at the time you receive it, or just pay a minimum amount on that bill and incur interest charges on anything left unpaid during that billing cycle.
So, credit cards are a way for you to borrow money from a bank to cover your everyday purchases and then pay that money back to the bank later. Some credit cards also come with different perks, like discounts on travel and hotels, cash back on purchases, and more.
Terms to Know
There are a lot of new terms that you will need to become familiar with when you’re shopping around for credit cards. Understanding these will help you understand the exact terms and conditions associated with each card and help you get the best deal based on your needs and the types of cards for which you may qualify.
Annual Fees: Some credit card issuers require you to pay them a fee every year just for owning and using the credit card. This is more common with credit cards geared toward those with bad credit as well as rewards credit cards. These fees range from as low as $29 all the way up to $500, sometimes more. Not every credit card will have an annual fee.
APR: APR stands for annual percent rate, and refers to the total interest that you will pay each year if you do not pay your full statement balance every month. The main APR that credit cards usually advertise is just for purchases; there are also different APRs for things like balance transfers and cash advances. You may also encounter something called a penalty APR, which is a higher interest rate associated with late or missed payments. This is one of the most important things to make sure you understand when getting a new credit card.
Authorized User: Authorized users are people whom you have listed on your credit card application and your account in order to allow them to make purchases using your credit card. Most credit card issuers will even offer to mail you a second card for your authorized users. While they’re allowed to use your credit card, and the account activity is reported to the major credit bureaus on their behalf, they are not liable for covering any part of the statement balance regardless of how much they may have used your card.
Available Credit: Your available credit refers to how much of your credit is available at a given time. If you have a credit card with a $500 limit and spend $120, your available balance would be $380. If you pay your full statement balance every month, you’d have an available balance of $500 after payment you make. If you choose to carry a balance, then your available credit will be reduced by the amount of those carried-over charges as well as any additional purchases that you make.
Balance Transfer: A balance transfer is the process of moving your balance from one credit card to another if you have multiple cards. Most people do this when they’re trying to take advantage of a lower promotional interest rate on another card. Most credit card issuers will have additional fees or a separate APR for doing this.
Billing Cycle: Your billing cycle is the amount of time between statements. By law, each billing cycle must be at least 21 days long, but you may notice some variation among different credit card companies. All of the purchases you make on your credit card in one billing cycle will be due on the statement for that billing cycle.
Cash Advance: Most credit cards will allow you to make what’s called a cash advance. This means you can withdraw money from your credit card. Cash advances are notoriously costly, though, because credit card issuers will impose higher interest rates and fees on the money you withdraw. Also, you are generally limited to a certain amount that you can advance — usually about 20% of your credit limit — and there is no interest-free grace period for cash advances.
Credit Card Statement: Your statement is something you will receive every month either through the mail or electronically. It serves two functions: The first of these is that your statement is a summary of how you’ve used your credit card throughout the entire billing cycle (i.e everything you bought). The second, and more important function, is that it is your monthly bill stating how much you owe the bank.
Credit Issuer: This is just your lender or the bank that provides your credit card.
Credit Limit: Your credit limit is the entire amount that you’re allotted on your credit card. The bank will decide your credit limit when the card is issued, and the amount is based on your credit score, income, and a handful of other factors. If you have a secured credit card, your credit limit will usually be limited to the amount you deposit when opening the card.
Credit Score: Your credit score is a three-digit number that serves as a quick measurement of your creditworthiness. Credit scores can range from as low as 300 up to 850. The higher your credit score, the better your creditworthiness to lenders. It is calculated using several different factors such as payment history, credit utilization, credit mix, credit age, and hard inquiries.
Fees: Fees are fixed rates that are charged for the different assortment of services that your credit card issuer offers. There are fees for late or missed payments, foreign transactions, cash advances, balance transfers, and more.
Grace Period: When it comes to credit cards, your grace period is the period of time between when your billing cycle ends and when your statement balance is due. Your grace period only comes into play with your regular purchases and does not apply to cash advances or balance transfers. Grace periods, like billing cycles, must be a minimum of 21 days but will vary among different credit card issuers.
Interest: Interest refers to the fee you will pay for the privilege of borrowing money on your credit card. Interest rates will vary among credit cards, different services on your card, and also based on your credit score. The amount you pay will be a percentage of your overall statement balance, which is what your APR is. You do not incur interest if you pay your full statement balance by the due date each month. Some cards may also offer no interest as part of an introductory offer.
Minimum Payment: Your minimum payment will be displayed on every statement you receive. This amount is the absolute least that you can pay on your statement balance to avoid incurring late or missed payment fees. If you only pay your minimum balance, the remaining amount you carry will be subject to your APR amount.
Types of Credit Cards
There are hundreds of different credit cards out there, and they all fall into one of several different categories. Some types of credit cards are more suitable for certain situations, some of them may have some extra perks or benefits, and some can only be used in specific places. Understanding what each one has to offer is going to help you make the most informed decision about the type of card you need.
“Credit card” is kind of an umbrella term. However, what most people are talking about when they use the term “credit card” is typically what’s called an “unsecured credit card.” Unsecured credit cards are what most people think of when they think of a traditional credit card. Unsecured credit cards act like a short-term loan that you are expected to pay back at a later date. The credit limit for these cards is determined by your income and credit score.
Secured credit cards are another type of credit card. They’re exactly like a standard card in every way, except they require a deposit for you to open the card. These can also have higher annual fees and APRs since secured credit cards are designed for people with bad credit or a limited credit history. Your credit limit on these types of cards is usually determined by the deposit that you’re able to pay upfront. These cards also report to all three major credit bureaus each month, as they are designed to help build or rebuild your credit.
Store / Retail Credit Cards
Store credit cards or retail credit cards are the ones you can get through a store like Macy’s, Ulta, or Target. These cards are not actually issued by the store but are branded as if they are. Instead, just like any other credit card, they are backed by a larger bank. A lot of retail credit cards are backed by Comenity Bank.
These types of credit cards typically can only be used at the store where you got the card (there are some exceptions to the rule) and usually come with low credit limits, and they can have the highest interest of all the different types of credit cards. Even though that’s the case, you do not incur interest when you pay your full statement balance. For that reason, these cards can still end up being a good deal as they can come with extra perks and discounts.
Charge cards are different from any other type of credit card, but they still generally act as a credit card. It is a unique type of payment card that requires the payment in full every month, so there is usually no predetermined credit limit. When there are credit limits imposed, they are usually much higher because this type of credit card does not allow users to carry a balance. Charge cards are almost always rewards cards that offer points for travel, hotels, airfare, and more.
One of the most popular charge cards, The Platinum Card® from American Express, offers perks such as discounts and credits for Uber, Saks Fifth Avenue, and airlines. It also provides elite status with both Hilton and Marriott loyalty programs. This type of card is usually reserved for those with excellent credit, with minimum scores around 700 to 750.
Rewards Credit Cards
Rewards credit cards are credit cards that come with extra perks or benefits. Some of the more common ones, historically, are rewards cards for hotels and airline travel. Every time you use your card, you can earn miles that can be used to cover travel, earn cash back, or other rewards. A lot of major credit issuers offer credit cards that work with well-known hotel chains and airline loyalty programs to earn their respective points or miles. There are often a lot of promotional offers to encourage you to use your card more, too.
Cash-Back Credit Cards are gaining more popularity in recent years. These types of credit cards give you a percentage of cash back on certain types of purchases, such as dining or gas. Usually, the base rate is 1% cash back, with up to 5% cash back on more premium cards or for specific bonus categories.
Travel Credit Cards are cards that earn points or miles for different types of travel. They can be co-branded to a certain airline or major hotel chain, or sometimes they have their own flexible travel points. Depending on the card, you can earn anywhere from one to five points per dollar. If you have a co-branded travel card, you will only be able to redeem these rewards with the specific airline or hotel chain that is affiliated with your card.
Bonuses are another type of reward you may see with a rewards credit card. Sometimes, a card issuer will offer bonuses on top of the usual awards. For instance, they will incentivize opening cards by offering a large sign-up bonus (in either points or cash back) for spending a certain amount in the first few months of card membership. They might also offer a bonus such as doubling or tripling the number of miles, points, or percentage in cash back you’ll receive during certain periods or for certain purchases.
Business Credit Cards
Business credit cards are for the average consumer. This type of card functions just like a credit card, only it is given to business owners rather than just any consumer. These cards can typically only be used for business expenses. They come with a lot of features to help make business owner’s lives easier as well.
Business credit cards tend to have higher credit limits and come with special features for tracking expenses, customizable spending limits for various authorized users, and even rewards geared toward business-related expenses.
The only true drawback of a business credit card is that these types of cards are not always subject to the same extensive protections for credit cards for regular consumers.
Other Types of Credit Cards
There are a few more types of credit cards as well.
Starter Credit Cards are offered to those with little to no credit history to help them establish their credit. They tend to have pretty low credit limits, comparatively speaking, but often feature lower interest as well. These are designed to be an easy-to-manage option for getting your first credit card.
Student Credit Cards work very similarly to starter credit cards. They are available to those with little to no credit history as long as they can provide proof of income and enrollment in a qualified college degree program. Student cards may have features like rewards for academic performance, lower interest rates, and longer introductory offers.
Credit-Building Cards are sometimes compared to secured credit cards. However, credit builder cards do not all require a deposit to open an account. They feature low credit limits but may have higher interest rates. Some of them may even offer no interest to provide some extra help to consumers with past credit issues. This type of card reports to the major credit bureaus every month. Chime’s Credit Builder Card lets you add money as you go, charges 0% APR, has no fees, and reports monthly.
Gas Credit Cards are credit cards that are usually only available for fuel purchases and are provided by gas stations and convenience stores. These often have no annual fees and provide you with rewards like discounts on gas or cash back on your fuel purchases. So, these are technically a type of rewards card, but you are just more limited on where you’re able to use them.
Balance Transfer Credit Cards are specifically designed for moving the balances of your existing cards onto these cards. The original issuer is likely to impose fees for balance transfers and may have a special APR for balance transfers. This is something that people use to take advantage of lower interest rates, consolidating bills, or the opportunity to pay off their debt in a shorter period of time.
Credit Card Terms & Fees
One of the most critical things that you need to understand when you’re getting a credit card is the cardholder agreement. The cardholder agreement is going to contain all of the terms and fees that you’ll be subject to when you’re approved for a credit card. In this section, we’re going to explore what you’ll find in the terms and conditions, the different types of fees that credit cards come with, and include some tips along the way.
Terms & Conditions
In an official sense, the “terms and conditions” of your credit card is the formal document that explains all of the rules, guidelines, and fees that you will need to make sure that you adhere to as you use your credit card. In this document, you will find all of the information about the APRs for different types of card use, minimum charges, statement dates, billing cycles, grace periods, and more. It will also outline all of the different fees that you may incur, how your balances will be calculated by the credit issuer, and how your payments will be processed.
The terms and conditions of a credit card should be readily available for you to read through before you even submit an application. You should never submit an application for a credit card without reading the terms and conditions. While this is a tedious process, it is vital to your financial health that you understand exactly what your credit card issuer will expect from you.
Introductory offers are special terms that are often offered to consumers during the first six months to a year of having an issuer’s credit card. Some introductory periods could extend up to 18 months. These are going to be outlined in your terms and conditions as well, and it’s a good idea to make note of when those introductory promotions are going to disappear.
There are several different things that you might encounter as part of an introductory offer when opening a credit card. The most common introductory offer that you’ll come across is 0% APR for the first few months or more. What this means is that you will pay 0% interest on any purchases in that introductory period even if you decide to carry a balance rather than pay your statement in full each month.
This is an awesome deal that can be helpful for a lot of people who are just learning to navigate the world of credit or want to take advantage of the low interest by transferring a balance. There is a caveat to this type of offer, though. Usually, that 0% APR only applies to regular purchases of products and services. That means that balance transfers and cash advances are most likely still going to be subject to their own specified interest rates. Sometimes 0% APR offers also apply to balance transfers but never to cash advances.
Other common introductory offers, especially when it comes to rewards credit cards, are bonuses. Bonuses include extra points, extra miles, or extra cash back just for opening the card. Just keep in mind that there will probably be a few requirements that you must fulfill in order to qualify for the bonus, such as making a certain amount of purchases, or paying three statements on time and in full.
Some credit card issuers will also waive the annual fees for the first year of having your card rather than charging it right up front. Make sure to look out for the time when you will be expected to start paying fees like this.
Interest is one of the key things that will be outlined in the terms and conditions or in the cardholder agreement. Interest can be one of the more complicated aspects of having a credit card, and you’ll want to pay attention to it. Understanding your interest and how to keep it from racking up is going to be the best way for you to keep your credit score in good shape, keep yourself from sinking a ton of money into interest, and save you from any surprises. As we mentioned earlier, interest on a credit card is usually called the APR or annual percentage rate.
Your annual percentage rate is the amount of interest you can expect to pay annually if you incur any interest charges. Generally speaking, the primary advertised APR for a credit card is the APR for purchases only. There are individual APRs for different types of transactions and different circumstances.
- APR for Purchases: This is the annual percentage rate you can expect to pay on normal everyday purchases. The only way to avoid paying this type of interest is by never carrying a balance and paying your card in full each month.
- APR for Balance Transfers: If you have more than one credit card and would like to transfer the balance to a different card to take advantage of lower payments or just to consolidate your credit card debt, there is a special APR that you will have to pay on those balance transfers. The APR for balance transfers may not be subject to the same grace period as regular purchases, and it is typically unaffected by introductory APR offers.
- APR for Cash Advances: Cash advances — which is when you withdraw money from your credit card — are also going to have a different APR than other types of transactions. Cash advances are considered expensive because they typically have a very high APR. As with balance transfers, cash advances have the same APR regardless of the introductory terms that came with your credit card unless it explicitly says otherwise in your cardholder agreement. Cash advances do not have a grace period and start incurring interest immediately.
- APR for Penalties: Many different credit card issuers have something called a Penalty APR. Basically, you will be required to pay a higher interest rate as a penalty for overstepping the terms of your card agreement. This could include spending over your limit, missing a payment, making a late payment, or something else along these lines. Make sure you read all of the information about the Penalty APR in your terms and conditions so you never have to pay this rate.
- Variable APR: A variable APR is not going to be available with every credit card, but a lot of them have them nowadays. All this means is that your APR can change over time, and your credit card company may not need to notify you. Variable APRs are usually based on something called the index rate and can fluctuate with the economy.
Regardless of what your APR is, your credit card issuer is also going to have minimum interest charges that come with carrying any type of balance. These are usually around $1, and the minimum interest charge is not reflective of your statement balance. This is just something that they will do if they have to charge you any interest at all. You will only be charged the minimum if you carry over a very small balance.
How Does Interest Work?
Now that you have a better idea of what types of interest you may be charged while using your credit card, it’s time to take a deeper look at how interest works. Interest can end up being very costly; in fact, it is how most banks make their money in the first place. However, you may be able to avoid paying any interest whatsoever depending on how you choose to use your credit card.
Interest rates on credit cards are based on your APR; however, do not let that trick you into thinking that you will only pay interest once per year. Your APR is just the total interest that you can be charged in a calendar year. The credit issuer actually calculates your interest on a daily basis according to your balance. How this works is that your credit issuer will multiply your daily interest rate by your balance each day and then add that to your balance. In some cases, they may just multiply your average daily balance over a billing period by your daily rate.
So, here is an example of how that would look: Let’s say that you have a credit card that has a $1,000 limit and your APR is 17%. You make a purchase for $450 on your credit card, leaving you a balance of $450 when you receive your statement. You choose to make the minimum payment of $13.50, which leaves you with a balance of $436.50.
If your APR is 17% annually, that means your daily rate comes out to be .05%. If your credit issuer multiplies your average daily balance of $436.50 by your daily rate and then multiplies by a 30 day billing cycle, that amounts to $6.55 in interest for a single billing cycle. This brings your next statement balance to approximately $443.05 if you do not incur any other charges or make any other purchases. You may technically pay a hair more as interest can be charged on the interest accrued each day.
How Do I Keep From Paying Interest?
That’s a little bit confusing and, as you can see, can become costly very quickly. There is only one thing that you can do to avoid having to pay interest and that is to make sure that you always pay your full statement balance every month. Using the example above, your full statement balance would be $450. If you paid that entire amount, you would not pay any interest on that balance. This is thanks to the grace period that credit card companies offer.
The only exception to this rule is for credit cards that offer 0% APR as an introductory offer. You will not begin incurring interest, as long as you’re making the minimum payment every month, until that introductory period ends. If you fail to pay off your entire statement balance before the end of the introductory period, you will be charged interest on your full balance, including those charges made during the introductory period that have not yet been paid off.
What If I Don’t Pay My Statement In Full?
Sometimes things happen, and you may not be able to pay your full statement balance in a month. It’s okay; it is something that happens to everyone sometimes. When your credit card statement comes, you do have the option to pay less than your full statement balance if you need to. On every statement you receive, you will see a line that shows your minimum required payment.
Your minimum payment is the smallest amount that you can pay toward your bill and still remain current. Failing to pay at least the minimum balance is going to result in late fees, missed-payment fees, and can cause you to have to pay the Penalty APR if applicable. Making a payment of at least the minimum balance is also very important for your credit score! Payment history is the most important factor used in calculating your credit score, so you should do your best not to miss any payments. If you’re ever in a situation where you feel like you may need to skip a payment, the best thing to do would be to reach out to your credit card issuer as soon as possible to discuss your options.
Typically, your minimum payment is equal to between 1% and 3% of your total balance. In the above example, the total statement balance was $450, so the minimum payment was $13.50, which is 3% of the total amount. Note: this is just an example and your minimum payment will often be a flat fee of around $25 if your balance is less than a certain amount in a given billing cycle.
If you only pay the minimum, or if you pay any amount less than the full amount listed on your statement, that is what is known as carrying a balance or revolving a balance. This is when you will start to incur interest and is something that you should try your best to avoid simply because credit card interest is very costly.
Following the example above, if you continued to make the minimum payment every month, you would end up paying a total of $140.13 in interest, meaning that $450 purchase will come out to more than $590 when all is said and done. On top of that, it would take you more than three years to pay it off!
Granted, everyone’s situation is going to be different, and there may be times that avoiding interest isn’t a possibility. Even when that is the case, you should always make it a point to pay as much as you can on your balance to save yourself money in the long run.
The final reason for reading all of the terms and conditions for the credit cards you’re considering before you even apply is to understand the fees that the credit issuer charges. There are fees for all different sorts of things on your credit card — and some may be higher than others, so it’s a good idea to use this as a comparison tool. In addition, you will want to know exactly what fees the issuer charges for what services so that you know how to avoid having to pay any of them.
Some common credit card fees include the following:
- Annual Fee: This is a fee paid once per calendar year just to keep your card. Annual fees range from roughly $30 to $100, but some may be higher. There are a lot of credit cards that do not come with any annual fees, too. Instead of an annual fee, some credit cards may require you to pay monthly fees, but this is more common with secured credit cards or credit-rebuilding cards.
- Balance Transfer Fee: If you choose to transfer your balance to another credit card, you may be subject to a balance transfer fee. Typically, a balance transfer fee is going to be either a flat rate or a percentage of the balance you’re transferring, whichever is greater. As an example, if you transfer a balance of $300 and your credit card has a flat fee of $5 or 3% of the balance, you would have to pay a balance transfer fee of $9. These fees are completely separate from your balance transfer APR. They are added to the transferred balance on the new card.
- Cash Advance Fees: Whenever you use your credit card to withdraw money, that’s a cash advance. Typically, even the amount you’re allowed to advance is limited. This is one of the most costly services to use on a credit card because the interest is high and begins accumulating as soon as the money is received. There are no grace periods, and there are fees on top of all of that. An average cash advance fee is structured the same way as a balance transfer fee: a flat rate or percentage, whichever is greater. If your credit issuer has a cash advance fee of $10 or 5%, and you get a cash advance of $300, you would pay a $15 fee.
- Convenience Fees: These are actually imposed by merchants; however, it is worth mentioning them here. Some retailers will charge you a convenience fee for paying with a credit card at their location. Your credit issuer has no control over these fees, and they are generally unavoidable unless you choose to use another payment method. They can also sometimes be avoided if you make a purchase of a certain amount, depending on what the merchant requires.
- Foreign Transaction Fees: Your credit card issuer is going to charge you a fee on every foreign transaction you make, whether you’re shopping online from a foreign company or traveling overseas. You may also see it described as a Foreign Currency Exchange Fee, and it is usually about 3% of the total purchase price. The best way to avoid these fees would be to choose a different payment method or, if you are a frequent international traveler, be sure to seek out a card that has no foreign transaction fees.
- Late Payment Fees: When your billing cycle ends, you will be mailed your credit card statement either physically or electronically. That statement will list the due date for your payment, and you must make that payment by that date or you may be subject to late fees. Late fees can range from $25 to $40. Usually, you will see a lower amount for your first late payment (and may even be able to have your first one waived). After you’ve paid a late fee, the fee can increase if you happen to make another late payment in a six-month period.
- Over-The-Limit Fees: These are not going to be a problem for most people. Some credit cards give you the option to make purchases that exceed your credit limit. However, if you do so, you may be charged a fee that could end up being as high as the amount you exceeded with your purchase. To avoid this type of fee, never opt in to this service. If you do not have enough of an available balance to cover a purchase, your card will just decline the transaction instead.
- Returned-Payment Fees: This type of fee is charged when you don’t have enough money in your bank account to pay your bill. The credit card issuer would not receive any of that payment, and it would go back into your account. When this happens, your credit card issuer will charge you a fee of up to $35. To avoid this type of fee, make sure that you have enough funds in your bank account before making your payment and be mindful of any pending transactions.
Regardless of what your APR is, your credit card issuer is also going to have minimum interest charges that come with carrying any type of balance. These are usually around $25, and the minimum interest charge is not reflective of your statement balance. This is just something that they will do if they have to charge you any interest at all.
Applying For Credit Cards
It can be a little stressful when you’re applying for a credit card. There is no way to tell if you’ll be approved or denied ahead of time, so it is completely natural to be nervous about the process. In this section, we’re going to walk you through exactly how credit card applications work and help you feel prepared for submitting yours.
Credit card applications are done almost entirely online these days, and many applications can be completed right from your mobile phone. They are relatively easy to fill out, although they can be a little tedious. If you’re applying for a credit card online, make sure that you never do so on a public computer, public network, or any website that does not appear to be secure. This is extremely important because your credit card application is going to collect a lot of your personal information, and you don’t want that getting in the wrong hands.
You will need to fill out your name, address, date of birth, Social Security number, employment information, income information, and banking details. As you go through the application, make sure that you’re reading everything carefully and not just blindly checking boxes to make it go faster. You are filling out a binding contract that you will be required to adhere to once you’re approved. Any false information has the potential for legal trouble down the line. Once you’ve completed the form, you will submit it.
The credit issuer will then go through the process of reviewing your application. They will confirm your details and then check your credit report. There are three major credit bureaus — Experian, Equifax, and TransUnion. The lender will request your credit report from one of these bureaus. This is something that is called a “hard inquiry” on your credit, which is when a lender obtains your credit report to evaluate your potential as a borrower. These inquiries will show up on your credit report.
The credit issuer will look at your credit scores, payment history, overall debt, and your income information. They use this information to determine your creditworthiness and to make a decision about your application. This information is also used to determine things like your credit limit and APR. The lender may also go through extra steps to verify your information either with your employer or your bank.
Most credit card applications provide results instantly online as well. If you are approved, you will move on to the next phase of getting fully registered and set up. If you are denied, you will receive an immediate notice that you have been denied. You will then receive a formal explanation for that denial in the mail within a few days.
The decision to approve or deny your application is based primarily on whether or not they believe that you will be able to afford to pay them back and how you’ve treated your credit in the past. The credit report will have information that lists all of your open loans and credit cards, your payment history, credit accounts that you have closed, any loans or bills that have been turned over to a collections agency, all of the hard inquiries that have been done, all of your employer information, and more. Public records, any joint accounts, past addresses, and other names you may have used are also included.
Your Credit Score
All of the data that is laid out in your credit report is what is used to calculate your credit score. Your credit score is a three-digit number that succinctly summarizes your overall creditworthiness. There are different models and algorithms used to calculate credit scores, but there are usually only slight variations. Most financial institutions use the FICO scoring system.
Your credit score can be anywhere from 300 all the way up to 850. The better your credit, the higher the number is going to be. Since most financial institutions use FICO, this is the average FICO score range and credit rating.
- Poor Credit: 300 to 579
- Fair Credit: 580 to 669
- Good Credit: 670 to 739
- Very Good Credit: 740 to 799
- Excellent Credit: 800 to 850
How those scores are calculated is based on five main factors, with each one having a different impact on your score. The most important factor is your payment history because it accounts for the largest portion of your score. A history of making your monthly payments on time is going to mean a better score. Missed payments, late payments, and delinquencies can drag down your score.
The second factor used in calculating your credit score is your credit utilization ratio. This means that the amount of your available credit that you regularly use on a monthly basis is going to be examined. Most experts agree that your credit utilization ratio needs to stay below 30% to keep your credit healthy. As an example, if you have a credit limit on one card of $1,000, you should try to use $300 or less of that available credit on a regular basis.
The next few factors carry much less weight, but they’re still important. The average age of your credit accounts will be a contributing factor to your score. Having a longer credit history helps demonstrate to the bank that you are less of a risk because you have experience in handling credit in the past. For this reason, it is often not advisable to close old accounts because it decreases your credit history and can bring down your score.
The types of credit you have, such as credit cards, loans, and lines of credit are another factor. Having a good mix of different types of credit can have a positive impact on your score because it shows lenders that you can manage different types of debt responsibly. Having multiple credit accounts will also help boost your score. If you’re just getting started on your credit journey or just don’t have any other forms of credit, don’t let this discourage you. It is not mandatory to have a variety of types of credit to secure a credit card.
The last thing that is included in your report is new credit. Credit card issuers will look at how many accounts you have applied for recently (even if you were denied) and how many hard inquiries are on your credit profile. Having a lot of new lines of credit can make you seem like more of a risk because taking on a lot of new debt at once can be financially irresponsible. Having a lot of hard inquiries is also something that can drag down your score. A large number of hard inquiries can give lenders the impression that you’re a risk because it looks like you’re trying to get more spending power in a short period of time — a sure sign of financial distress.
There are a lot of ways that you can protect your credit score or improve it if you’ve had credit problems in the past. It is important for you to monitor your credit score and do your best to maintain or improve your score over time. Having a better credit score makes it easier for you to open credit cards, apply for financing on a car, secure a mortgage, or get a personal loan.
Higher credit scores are also very favorable for lenders because it demonstrates that you will pay them back. This can lead to you having lower interest rates, better loan terms, higher credit limits, and access to more premium credit cards than someone with just average or poor credit. Keeping your credit healthy is a lot easier than repairing it when it is unhealthy, and it can save you a lot of money down the line.
How To Pick The Right Credit Card
Before you apply for any credit cards, you’re going to have to pick which one is the best option for you. This can become a lengthy process but one that is always worthwhile. If you follow the steps outlined below, you can make sure that you are getting the best deal possible and that you’re not causing any unnecessary blows to your score by getting denied.
Understand Your Goals
The first thing to think about when it comes time for you to get a credit card is why you are getting it now. Do you want to use this credit card to establish your credit for the first time? Do you want to use this credit card to help repair your credit? Are you using it as an emergency fund or to finance a large purchase? Would you like to use this credit card to consolidate your debt?
When you know what you’re going to do with your credit card, then you can start to get a picture of what type of card is going to work for you. If you’re establishing or repairing your credit, you might need to stick to a secured credit card for now. If you’re planning on using the card to consolidate your debt, a card specifically for balance transfers may be right for you.
Understand Your Financial Situation
After you decide what you want to get out of opening a new credit card, take a look at where you are right now financially. Do you have enough credit history to qualify for a regular credit card or do you need to look for a starter credit card? Do you have enough income that you can afford to make your credit card payments on time? Do you think that you will need to frequently use a lot of your available credit or even max out your card?
If you know that you don’t have a lot of extra funds each month, perhaps it is a better idea to wait until you’re more capable of making payments before getting a credit card. You may even choose to save money each month for a downpayment on a secured credit card. You should always make your payments; however, a secured card could provide you with a little bit of extra protection if you were ever unable to pay.
If you think that you would be consistently using the majority of your available credit, it might be a better idea to wait as well. Having a high credit utilization ratio can be very harmful to your score.
Thinking about these things and using a free online tool to check your credit score are good second steps, that way you have a picture of what kinds of cards you might qualify for and if any of them match your goals.
Understand Eligibility Requirements
Knowing where you’re at financially will allow you to start narrowing down the list of potential credit cards you can apply for. In order to get any credit card, you must be over the age of 18, and you must be employed or have some source of provable income.
Different cards will also come with their own individual requirements. Some credit cards will not even consider applicants with limited credit histories, for example. Online comparison tools all over the web can also help you to understand what range of credit scores a bank is looking for when it comes to certain cards.
A card like the Chase Freedom Unlimited® Credit Card wants applicants to have good credit in order for them to be eligible, so your score should ideally be in the high 600s. Some cards only require your score to be in the high 500s. There are even credit cards specifically tailored to those with poor credit, and they have significantly lower score requirements.
So if you know you have a limited credit history, you should look for cards that are willing to extend credit to people in your situation. Once you know your credit score, you can look at the different types of cards you may be eligible for as well. Ideally, you want the confidence of knowing that you meet the requirements for a credit card before applying so you don’t end up with a barrage of hard inquiries on your record after being denied.
Understand the Terms & Conditions
You know what you need, you found a card that fits, and you’re pretty sure you will be able to get it. Now it’s time to make sure you understand the credit card you’ve selected. The terms and conditions should always be readily available for you to read before applying. If for any reason they are not available, you should absolutely not submit an application.
When you think you’ve decided what card you’d like to apply for, you should take a look at all the information we listed earlier in this article. Understand what the interest rates are, if there is an introductory period, and when you will need to start paying your interest. Look at the different fees that the particular card issuer charges.
You should also look at where you will be able to use your credit card before you apply. For example, if you choose a Discover Card, make sure it is accepted at the places where you’re most likely to use it. If not, consider another option.
By the time you finish reading the terms and conditions, you should feel like you know that card inside and out. It is important to know what rules, charges, and fees you will be subject to before you apply.
Compare Different Cards
If there are a few cards that might be suitable for you, then you should take the time to compare them. Does one of them offer a longer introductory period? Does one of them have lower interest rates? Are there fewer fees associated with one of them? Which one rewards purchases in the categories you spend the most money?
You may not be able to find a credit card that is completely perfect, especially if your score is closer to average. In spite of that, you will still get a lot of good information by comparing and contrasting a few cards. Maybe one of them has a lower APR but a higher annual fee. If you know that you’re never going to carry a balance, the one with the lower annual fee would be the better deal.
You may be able to find cards with very similar terms, but one of them comes with extra benefits or rewards. Are those rewards worth paying the slightly higher interest or annual fee? Will you use those rewards?
Credit cards are something that you want to keep for a long time. Take your time to pick the right one.
Take Advantage of Pre-Qualifications
Some credit card issuers offer you the ability to see if you prequalify for a specific credit card. You may also use a free tool like the ones offered by Credit Karma or NerdWallet that will ask you a few questions about your credit and then present you with a list of cards based on your approval odds for each one.
Both of these are considered a type of pre-qualification process. You will still be required to enter your name, address, date of birth, Social Security number, and income information, but this will not result in a hard inquiry going onto your credit report. Prequalifying is considered a soft inquiry or a soft pull.
It is a way to preliminarily look at your credit to see if you have a strong chance of being approved for a credit card or if you may be better off looking at another one. The best part is that a soft inquiry has no impact on your credit score. You should take advantage of tools like this whenever they’re available to help you keep the number of hard inquiries reflected on your report as low as possible.
Don’t Be Afraid To Ask Questions
If you come across anything that you don’t understand in your credit application or anywhere throughout the terms & conditions, cardholder agreement, or other documents, you should look into it. You can call and speak with a representative at most major banks, and they can help you get on the right track. You can also do a little bit of research into any words or rules that you aren’t comfortable with.
It doesn’t say anything negative about you to have questions or need additional information before making a final decision. It is actually a great show of financial responsibility.
Should You Get A Credit Card?
Credit cards are good to have for a lot of reasons. Whether you are nervous about applying for one or are eager to do so, you may still be wondering if it is the best thing for your financial well-being. In this section, we’ll go over some of the reasons you should go ahead and apply as well as reasons you should possibly wait a while longer before taking such a huge step.
You should get a credit card if you are looking to establish or repair your credit. They are not the only way that you can get the job done, but they are one of the best options. When you open a credit card, use it wisely, and pay your bills consistently. If you do that, your score is going to go up.
You should get a credit card if you want to make a large purchase and need some extra time to pay. As long as you are able to pay your bill when it comes due, there is no reason not to go ahead and get a credit card to help you cover this purchase, especially if the card has a 0% APR promotional period.
You should get a credit card if you want to use it for the rewards. Miles, discounts on travel, points, and cash back are all awesome perks that come along with using some credit cards. If you want to use your credit card as a way to rack up those rewards and save yourself some money, go for it!
You should get a credit card if you’re looking for a more convenient or secure way to pay for products and services. Credit cards make it so you don’t have to bother with cash or checks, and you don’t have to worry about any money leaving your account until it is time to pay your bill.
You should get a credit card if you want a safety net in case of an emergency. Even if you do have savings built up, this can provide you with an extra boost if you ever need one and can help improve your credit score.
Basically, you should get a credit card as long as you know that you are ready to use it wisely and think that it would be beneficial for you to have one.
However, there are some cases where it might not be time for you to take the leap and submit any applications.
You should not get a credit card if you know that you struggle with overspending and don’t think that you will be able to handle that extra responsibility right now. Recognizing this is very important, and you should be honest with yourself about your spending habits.
You should not get a credit card if you know that you will need to consistently carry large balances. Having a high credit utilization ratio is going to negatively impact your credit score if you keep your cards close to maxed out on a regular basis. Additionally, you will incur so much interest by carrying a balance that you could end up inadvertently burying yourself in debt.
You should not get a credit card if you are not steadily employed or have some steady source of income. Paying the full balance every month is very important, and you don’t want to run into a bad situation with interest or late payment fees.
You should not get a credit card if you already have a lot of debt or a lot of bills that you sometimes struggle to manage. Adding another bill into the mix would just cause extra stress that you don’t need.
You should not get a credit card if you’re not willing to do the research required to make an informed decision about your financial future.
Basically, you should not get a credit card if you do not feel that you are financially or mentally prepared to take on the responsibility that comes with having access to a line of credit. There’s nothing wrong with that! In the meantime, an option like the Chime Credit Builder Card or Self Lender can help you build up your credit without putting you at more financial risk.
Using A Credit Card
When your credit card arrives, the first thing that you should do is read through all of the enclosed documents and then follow the steps to activate your card. After that, you’re all set to use it! In this section, we’re going to dive into a few different aspects of owning and using a credit card.
You can use your credit card pretty much anywhere, whether you’re shopping online, paying for a subscription service, getting lunch, paying a bill, or doing some grocery shopping. You will use it the exact same way that you use your debit card—only you may be asked to sign for the purchase instead of entering your pin in some places.
There are four major credit card networks: Visa, Mastercard, American Express, and Discover. Your card is going to belong to one of those networks, and the network will be easily printed on either the front or back of your card. As long as the merchant accepts credit cards in that network, you’re good to go. In the event that you come across a merchant that doesn’t accept your card, you will have to use another payment method.
Something that you may run into, specifically with some online subscriptions, is that they may not accept credit cards. This is a way of protecting themselves from fraud and not because of your card, your credit issuer, or anything you have done. Some purchases, like lottery tickets, may not allow you to use credit cards either for the same reason.
Every time you use your credit card to make a purchase, that amount will be deducted from your available balance. Your total available balance each billing cycle is equal to your credit limit. Any time you try to make a purchase that would push you over that limit, it will be declined. The only time these purchases will not be declined is if you choose to opt in to over-the-limit coverage, which comes with steep fees. Ideally, you should not be using that much of your available credit each month anyway in order to keep your credit utilization ratio low.
Credit Card Statements
At the end of every billing cycle, you will be mailed a credit card statement. Your credit card statement has two functions: It is a summary of all of your account activity in the specified period, and it is your monthly bill. You can usually choose to receive your credit card statements through the mail or electronically.
Every credit card issuer will have statements that look a little different, but the information included in your credit statement will always be the same. When you receive it, you will see that it is broken up into the following sections.
This section is the most important one on the entire document because this is where you can see your current balance, which is how much you owe for this billing cycle. The current balance is calculated based on any purchases you made during the billing cycle and any interest you may have incurred if you have been carrying a balance.
You will see the minimum payment due in this section as well. Like you read earlier, the minimum payment is the absolute least amount you can pay to keep your account in good standing. Paying the minimum balance will cause you to incur interest unless you’re in an introductory period that has a 0% APR.
Also in the payment information section is the due date for this bill. Make sure that you pay your bill on time as often as you can. If there is ever a time that you might be late, it is a good idea to reach out to your lender ahead of time to discuss your options. If you are paying by mail or through an electronic check, make sure that you send the payment early enough that it will arrive by the due date so you don’t accidentally get stuck with a late fee.
This section of your credit card statement is going to be full of math. It is the part of the statement in which your lender will describe how your current balance was calculated. It starts with last month’s balance, subtracts payments you’ve made, adds any charges you have made since your last statement, and adds on any interest and fees you may have incurred over the past billing cycle.
You will also be able to see your available credit, credit limit, and cash advance limit in this section. Giving this part of your statement a bit of extra attention to check for mistakes is recommended. You don’t want to have any surprise charges on your bill because a mistake was made somewhere along the line.
If you have a rewards card, this section will explain all of the points, miles, or cash back that you earned over the course of the last billing cycle. You will also be able to see your total rewards earned in this section if you have this type of card.
This section will always be the same, so you don’t have to feel obligated to read through it every month unless you know that something is about to change. This part of your statement explains how the bank does its calculations, how your payments are applied to your account when you make them, instructions on what to do if you find a mistake in your statement, and some legal disclosures.
It can be helpful to familiarize yourself with this information, but it isn’t something you need to scrutinize every single month.
Payments & Credits
This section will show all of the payments that you have made on this balance already and any credits that you may have received. The most common reason that you may receive a credit is if you purchased something with your credit card and then later returned it for a refund. Those funds would be credited back to your account.
This is a section that you should make sure to double-check every time you receive a statement. Any payments made online should reflect in your account within three business days, and any payments made by mail may take a little bit longer, up to 10 days under normal circumstances. Credits should not take a very long time to show up, either. Just make sure this information is correct.
If you find that it isn’t, you can turn to the instructions in the Account Information section to get it resolved. If you would like to be extra cautious, you can keep all of your credit card receipts and paper statements in one place to cross-check them whenever necessary.
This is the second most important section on your credit card statement and it is the one you’re going to want to make sure that you’re diligent about checking over. This section includes a list of all of the new charges you incurred over the last billing cycle, so all of the purchases you made will appear here.
Checking this part is important to make sure that you were not double-charged in error and that there are no fraudulent charges on your card.
Hopefully, you will be able to avoid incurring any interest on your credit card; however, if you do, this is where you can find all of the details that pertain to it. If you’ve been charged any interest or fees, this section will explain all of the fees and interest charges you’ve incurred year-to-date and include an interest charge calculation for any charges that have incurred interest in the current billing cycle.
Under this section, you will also find details about your interest rates on purchases, cash advances, and balance transfers.
Making your payments on time and paying the full statement balance is the most important thing about using your credit card. It is the only way that you can avoid incurring any interest. Your card may offer introductory bonuses that include 0% APR for purchases for a specific period of time; this is usually the first 11 to 18 months of owning your card. If you’re still in your introductory period, a lot of the following information may not apply to you.
One thing to keep in mind if you do have a 0% APR when you first open your card is that it usually only applies to purchases. You will most likely still be charged interest on any balance transfers or cash advances you make during that introductory window. Also, you will begin incurring interest on your entire balance when that period ends. For that reason, it’s very important to make sure you’re still making payments.
When it is time to make your credit card payment, the most important thing that you will need to look at is your statement balance. This is going to be a summary of all of the charges you’ve made on your credit card during the last billing cycle (it will also include any balance you’ve carried and any applicable interest). That amount is the actual amount of your bill. If you do not pay your full statement balance each month, you will incur interest charges.
You may also see this referred to as your current balance, your new balance, or your outstanding balance. Regardless of how it is described in your statement, that amount is your full bill. If you carry a balance: You may see that your current balance is the total charges you’ve incurred to date but have yet to pay, and your statement balance is the summary of new purchases, fees, and interest.
You should always pay your full balance as long as you are able. If for some reason you are unable to pay your full balance, there are other options. Your statement will also show you a minimum payment, which you’ve read about a few times in this article. Your minimum payment is the smallest amount that you can pay in order to stay current on your bill. Paying your minimum balance will result in you carrying a balance over to the next billing cycle, and that remaining amount that you didn’t pay will begin to incur interest.
Some credit cards will also give you the option to make a custom payment, as long as it is greater than your minimum balance. In this case, you would still incur interest on the balance that you carry over, but it would be lower because you were able to pay off a greater portion of your full balance.
You should also know that you will not incur interest during the grace period, which is the time between your statement being generated and the time your payment is due. By law, grace periods must be at least 21 days but could as long as 30 or 45 days. The grace period for your statement balance ends on the due date you observe on your statement; after that point, you will begin to incur interest on anything left unpaid.
Being Smart With Your Credit Card
In this guide, you’ve learned all about what types of credit cards there are, how they work, how to choose a credit card, how to use it, and how to read and pay your billing statements. You’re thoroughly prepared for anything that can come your way throughout the process of getting a credit card. Once it is in your hands, though, there are some key tips to keep in mind to make sure that you are using it wisely.
The worst thing that you can do when you get a credit card is to end up using it as if it is free money. Having access to a line of credit is definitely a bit of extra financial freedom but overspending is going to lead to a lot of trouble down the road. Remember, interest is how the banks make a lot of money. You will be required to pay back everything you spend on your credit card, and you shouldn’t spend more than you can reasonably pay back in a single month. This is the best way you can avoid incurring interest. If you end up being unable to make payments on your credit card because of overspending, your credit score will take a huge blow. It is worth being conscientious about your spending.
Check Your Monthly Statements
Accidents can happen, computers can make errors, and sometimes you may come across a sneaky charge that you weren’t expecting. Becoming comfortable reading your statements and keeping track of your credit card in this way is going to help you spot these mistakes if any of them ever occur. This is also important for protecting yourself from any fraudulent charges. If you don’t catch them in time, you may end up having to eat the cost. Banks have systems to recognize fraud when it happens, but they can miss things sometimes.
Make Your Payments On Time
We’re going to make this point again. Making your payments on time every month is one of the most important factors in calculating your credit score. Making your payments before the due date will also protect you from any late fees. Always pay your full statement balance unless there is a significant emergency that keeps you from being able to do so. This is important to save you money and to keep your credit utilization rate down, which is the second most important factor when it comes to your score.
Maintain Your Credit Utilization Ratio
Do not max out your card every single month. All this will do is create more financial strain on you if there is ever a time you’re unable to pay your full balance. Your credit utilization ratio should remain under 30% in order to make sure your credit stays healthy. For those of you who already have credit issues to repair, you should aim for an even lower 10% utilization rate. Keeping this ratio low is equally important as paying your bills.
Be Careful with Cash Advances
Make sure you remember that cash advances are subject to high fees, high interest rates, and do not have a grace period. They begin incurring interest immediately. These are very expensive and should be avoided at all costs to save you money.
Keep Your Card Safe
Make sure that you keep your card in a safe place so that you do not physically lose it, especially because most purchases on a credit card do not require a PIN to be entered at checkout. Also, make sure that you do not provide your card details to anyone over the phone or through email, and never provide your card details to someone that you don’t fully trust.
Also, make sure that you only use your credit card to purchase from websites that you trust and that have secure checkout. Your details can get stolen online if you do not take the necessary steps to protect them.
The Best Credit Cards
In addition to walking you through how to pick the best card for yourself, we’ve also done a lot of the research for you to help you find the best credit cards for students, the best starter credit cards, and the best store credit cards.
If you want a card that offers 0% APR or has no fees, we’ve got you covered. Whether you need to fuel up with a gas credit card or fund your dreams with a business credit card, you will be able to find some great options.
If you prefer a certain network, you can look at the best credit cards from American Express or Visa. If sticking to a bank that has a strong background as a credit issuer would make you feel more secure, Chase and Capital One offer a broad range of credit cards for different types of consumers.
You can earn some awesome perks with any one of the best credit cards for cash back. If your main concern is getting your credit score back, though, you can explore the best cards for bad credit or consider a secured card to put you on the right track.
You can also explore tools that help you compare the best cards for you based on the terms, your needs, your credit history, and approval odds. You can find tools like this at Credit Karma or use the one offered by NerdWallet without even having to register for the site.
Common Credit Card Questions
- Is Applying For A Credit Card Bad For My Credit?
- Is There A Minimum Score For Getting A Credit Card?
- How Can I Improve My Credit Score?
- How Do I Get My First Credit Card?
- What Is A Secured Credit Card?
- How Do Credit Cards Work?
- How Many Credit Cards Should I Have?
- Is A Credit Card Worth It?