I’ll never forget my first credit cards I got. I was in college and walking by a booth on campus where a bank was offering credit card applications. I wanted to buy tickets to a concert, but a credit card was required to complete the purchase, so I asked the people at the booth about my options. Before I knew it, I was signed up for a credit card and ready to buy those tickets. The process was shockingly simple given the fact that I had no credit history.
It is so simple getting a credit card that many might not be aware of the drawbacks that can land them in debt. To help avoid this happening to you, here are a few things you might want to consider about how credit cards work.
There Are Many Types of Credit Cards
If you’re new to credit cards, you might be surprised to find just how many different types of credit cards there are out there. Here’s a list to get you started:
- Rewards credit cards — offering things like airline miles, hotel points, and even cash back
- Student credit cards — designed to help students who haven’t yet built credit
- Secured credit cards — credit cards that require a deposit and can be used to build or rebuild credit
- Retail credit cards — offered by retailers and often advertised with a discount for your purchase
- Balance transfer credit cards — credit cards designed to help people pay off debt
- Low-interest credit cards — offering no interest on purchases for a set period of time (also often offered by retailers)
- Business credit cards — credit cards taken out by business owners
As for where to find them, you can shop around online or reach out to your local bank or credit union to see if they offer the type of credit card you’re looking for.
The Results of A Credit Check Typically Determines Your APR and Credit Limit
As with most things related to credit, you’ll almost always need a credit check to be approved for a credit card. One exception to this rule is secured credit cards, some of which don’t require a credit check since they do require a security deposit.
The results of your credit check typically impact the APR your card is assigned, as well as how much your credit limit will be. Generally, the lower your credit scores, the higher your APR and the lower your credit limit will be. That said, using your card responsibly could eventually result in the ability to improve your credit scores and improve future credit card offers.
You Can Apply for a Credit Limit Increase
As mentioned above, your credit scores can have a large effect on the credit limit you’re given on your credit card. However, you don’t have to be stuck with that credit limit forever. If you ever want to have a higher credit limit, and you have been building a positive history with your card issuer, you might be able to get that increase by simply asking for one.
Typically, to do this all you have to do is call customer service. They’ll check your credit and let you know whether or not they can increase your credit limit. Even if they say no the first time you ask, you can try again and likely get better results after your credit has improved. Some credit card companies even let you go through this whole process online when you log into your account.
Credit Card Interest Usually Compounds Daily
Typically, credit cards advertise their APR (or annual percentage rate), which gives you a rough idea of the cost of interest on your card. However, credit card interest is usually compounded daily. If you want a more accurate depiction of the interest rate you’re paying, simply divide your APR by 365, and that will tell you your daily rate.
You Generally Have a Grace Period In Which to Avoid Interest Charges on Purchases
Most credit cards offer a grace period during which no interest is charged on the purchases made (this typically doesn’t apply to cash advances, and it might not apply to balance transfers, either).
According to the Consumer Financial Protection Bureau (CFPB), the grace period is “The interval between the end of a billing cycle and the payment due date.” The CFPB goes on to say that, “No interest is assessed during this interval if a customer pays the balance in full before the payment due date and is not carrying a balance from month to month and has no cash advances outstanding.”
Paying Late Can Result In an Increased APR
You probably already know that you’ll likely pay a late payment fee if you don’t pay your bill on time. Did you know you might also have to deal with a penalty APR?
A penalty APR may occur when a credit card issuer increases your APR after you make a late payment. Often, this increase is for six months unless you continue to make late payments. Not all credit card issuers do this, however, so it helps to read the terms of service before you choose the credit card you want.
The Minimum Payment Generally Won’t Help You Pay Off Debt
With loans, you can slowly work your way towards payoff by simply making your payments every month. This isn’t necessarily the case with credit cards, as the minimum payments are typically only 1-3 percent of the balance on your card.
That’s not likely to make much of a dent if your goal is to pay any debt you accumulate off within a few months or even a year. You can find out how long it might take to repay the balance using the minimum payment only by looking at the chart in your latest statement — but understand that sticking to the minimum payment only is not a good way to stay out of debt.
How Much You Owe Affects Your Credit
Carrying a balance on a credit card doesn’t just keep you in debt — if the balance is too high, your credit could take a hit. There’s a factor in FICO® and VantageScore® credit scores called “credit utilization” that refers to the balances on all of your credit cards compared to the limits on all of your credit cards. Credit experts recommend keeping your credit utilization at 30 percent or below.
Paying on Time and Keeping Your Card Open Helps Your Credit
On the other hand, if you pay your credit card bill on time every month (and always make at least the minimum payment due), then that should help your credit. Payment history is the most influential factor in both FICO® and VantageScore® credit scores.
Besides that, keeping the credit card open helps your credit. FICO® has a credit score factor called “length of credit” and VantageScore® has one called “duration of credit.” For both, the longer your credit history, the better.
You Might Get Cash From Your Credit — For a Cost
You might notice when you get a credit card that your issuer sometimes sends you blank checks in the mail. These checks are convenience checks that enable you to borrow cash off of your credit card — but you can also sometimes do so at the bank or via the ATM.
This can be a helpful tool if you need to borrow cash, but it comes at a cost. Many credit card companies charge a cash advance fee and, potentially even more impactfully, the interest starts to accrue right away. In other words, there’s not typically a grace period on credit card cash advances. Before you take on the “convenience” of one of these checks, be aware of the cost you might have to pay.
You Can Learn a Lot Through the Fine Print
When opening or receiving a new credit card, you’ll often be presented with a small booklet outlining the terms of your new account. You can also find this information online even before applying for a credit card, as most banks list their terms and conditions for each credit card on the page of their website dedicated to that card.
Before you dismiss the terms of service as boring or illegible, give them a quick read. You can learn a lot through a credit card’s terms of service, including the following:
- Purchase APR
- Promotional interest rates
- Late fees (and whether or not there’s a penalty APR)
- Balance transfer fees and APR
- Cash advance fees and APR
- Foreign transaction fees
If you look online, note that some credit card issuers put this information under different terms, such as “rates and fees” and other similar terms. If the credit card issuer doesn’t make this information easy to find, that could be a red flag.
You May be Able to Use a Credit Card to Pay Off a Credit Card
Finally, one thing someone new to credit cards might not realize is that you can use a specific type of credit card to get out of credit card debt. This is called a balance transfer credit card, and it can be used as a debt consolidation tool.
So, how can a credit card help you pay off credit card debt? The key here is the interest rate. Balance transfer credit cards typically come with an offer of no interest on the balance transfer for a specific period of time (usually one year or even longer).
That said, if you still have a balance remaining when the no interest offer expires, then your entire balance will be charged at the card’s standard APR. Many consumers do another balance transfer before that happens to avoid accruing interest charges, or you can create your own payoff plan to ensure that your balance is paid off before the rate goes up (remember, the minimum payment won’t do that for you).