Everything You Need to Know About Credit Cards

If you’ve never used a credit card before, it can seem complicated and complex. Credit cards do have the capabilities to help you build credit and cover for any emergencies; although, if they’re not used responsibly they can also cause you debt. Getting your first credit card is a milestone and knowing the details of credit cards will set you up for success. 

What’s is a Credit Card?

A credit card is money provided by a financial company that allows you to make purchases. Since it is borrowed money, you do need to pay it back.  It is a plastic card with a unique number, security code, and expiration date. The security chip and strip on the card allows you to insert the card to make payments through POS systems used by businesses. 

Your bank will assign you a credit limit for your card. This is the amount that you’re allowed to borrow from the bank before the card maxes out. Once a credit card is maxed out, you can no longer use it until you pay it down. It’s important to remember that paying off the minimum each month is crucial as not paying your card off can lead to damage to your credit report and even cause you to go bankrupt

Once you use your credit card, you have roughly 30 days to make a payment. In this time period, you have to either pay the minimum amount due, a little more than the minimum or pay it in full. As long as the minimum is paid off after each grace-period, you will not receive any penalties such as late fees from the financial institution and your credit will not be affected.

In exchange for the bank allowing you to carry over your debt month-to-month, your credit card will charge you interest. Your interest rate is dependent on your credit history and the credit card you choose. It’s important to note that credit cards that offer rewards will often have a higher interest rate. 

The Benefits of a Credit Card

Using your card carefully and taking ownership of your card can result in building your credit score. Continuously paying off your credit card and paying more than the minimum each month can ultimately raise your credit score. Your bank will get reassurance that you pay your bills on-time and may even raise your credit limit. 

You have the option to get a credit card with rewards, the interest rate will be higher, but you will receive other benefits. Rewards can range from receiving travel wards to cashback. Typically, cashback is a percentage the bank is willing to give back to you after each purchase you make. Travel rewards may include airline or hotel credit.

An additional benefit of having a credit card is if you need to purchase something quickly, but don’t have the funds a credit card can cover it for you. Instead of paying large purchases at a pull price, you’re able to make small payments each month. 

The Disadvantages of a Credit Card 

If you don’t have the best spending habits, you can easily get into debt. Bad spending habits to look out for include missing your savings goal, shopping out of boredom, or not sticking to your budget. Keep in mind that a credit card is cash you don’t have. Try your best to spend less since unexpected debt may accumulate rapidly because credit cards are convenient and easy to use. You should become aware of the resources available to curb credit card temptations. 

If you miss your payment minimum or max out a credit card completely, your credit score will suffer. If you don’t pay the full amount of your credit card by the due date, your credit card payment will be considered late. Late fees will begin to accumulate and depending on your credit cards late fee policy you’ll be fined as much as $39. Every month you miss a payment will result in this charge on your next bill. Additionally, your credit score may drop because your payment history contributes to 35 percent of your credit score makeup. After 30 days of not paying off your credit card, an entry will be added to your credit report. 

A high-interest rate can make a small debt grow into large debt. You can owe a small amount, but depending on how high your interest rate is, you’ll pay a larger amount. Interest is expressed as an annual percentage rate (APR) which is the fee your bank charges you to borrow money. Interest is charged on the full amount of money you owe each month. This could increase over time according to how much you pay off. Start saving by keeping your debt small and paying off as much as possible. 

Also, if you max out your credit card, it will be detrimental to the health of your credit score. Your credit utilization ratio is the amount of credit you have used compared to the amount of credit you have available. Maxing out a credit card puts your credit utilization ratio at 100 percent. It would be challenging to keep your credit in exceptional standing when 30 percent is the recommended ratio to remain below. Your credit card issuer may think you are not in a positive financial standing to make prospective payments, this may lead them to close your account. If this happens call your issuer immediately and attempt to pay off as much as possible. This effort may show your credit card issuer that you have the funds to pay off the remaining balance and they may reestablish your card. 

Other disadvantages your credit card issuer may enforce are revoking your rewards due to consistent late payments. In extreme cases, after missing your bill for 180 days the card issuer may write the account as a charge-off and this would stay on your credit report for seven years. This could cause a rift in your living situation. Leasing or renting an apartment may become challenging as most landlords and property managers use your credit score to choose tenants.

Having a credit card can be an awesome responsibility. Try your best to maintain a low balance and if you can’t pay it off completely at least attempt to make small payments as often as you can. In the long run, paying off your monthly balance will be better for your credit score and your wallet. 

Katherine White writes articles for businesses that want to explore different marketing strategies. Currently, she is a contributor for 365 Business Tips and a digital marketing expert. Her educational background in Public Relations helps her tackle topics regarding strategy, branding and messaging.

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