Cashology by FNBO
Credit Card 101
Credit cards. Convenient, for sure. And a quick way to build good credit, if you use them wisely and pay your credit card bill on time every month. And that’s what we want to talk about today. Understanding credit cards, picking a good one for the way you want to use it and managing it . . . rather than letting it manage you. We’re calling this Credit Card 101. And it’s a great topic for anyone starting out with credit cards or who just wants to learn how to better manage the cards they have.
Everybody understands what a credit card is, right?
- It doesn’t’ hurt to start there.
- A credit card lets you access a line of credit offered by the bank that issued the card.
- So every time you use it to pay for something you’re borrowing money from the card issuer to cover the purchase.
- And then you have to pay that money back when your statement comes, either in full or over time.
- And if you choose to make partial payments then the card issuer charges you interest.
- So paying just the minimum every month turns into the most expensive option, since it will cost you the most in interest.
Credit cards can help you build your credit score pretty quickly, though.
- Yes, that’s true.
- Either a good credit score, if you’re paying on time.
- Or a bad credit score, if you’re not.
- Your payment history on a credit card will account for about 35% of your credit score.
- Which is a calculation of how risky it would be to lend you money.
- You really want a good credit score if you hope to get an auto loan or mortgage loan someday.
Is the same true for using a debit card?
- Nope. A debit card is different.
- With a debit card, when you use it, it pays for purchase by pulling money out of your checking or savings account.
- It has no impact on your credit score.
- Because it doesn’t involve borrowing money.
Are all credit cards the same? Does it really matter which one you get?
- It depends on what you want.
- There’s usually a trade off.
- Rewards cards usually have higher interest rates.
- Low interest rate cards usually have no rewards.
- Cash back cards give you money back, which you can use to reduce your balance or you can have the cash back deposited into a bank account.
- Airline and hotel credit cards give you miles or points you can redeem for free flights or hotel stays.
- General travel cards give you points that you can use to pay for any travel expense.
- But keep in mind you only get reward points for using the card to make purchases.
- If you pay your balance off in full each month, a rewards card can be the way to go.
- You’ll avoid interest and get the reward points.
So if you pay off your balance in full each month, think rewards card. And if you make partial payments, think low-interest card?
- That’s right.
- If you opt for a low interest card, something to watch for is a low introductory rate – which then reverts to a higher rate after the introductory period is over.
- So you might start with 0% interest but after three or six months that introductory offer will expire and you’ll be paying interest.
- The secret is – know what the interest rate will be after the introductory offer is over. You don’t want to be surprised.
What about perks and special offers? What are some of the better ones we can get?
- A sign-up bonus is a good one. You could set aside the bonus to start a savings account or emergency fund.
- Ongoing rewards and points. It’s a way to get back some of the money you spend.
- A 0% introductory rate. So you can avoid interest on purchases you make during an introductory period.
- But the main benefits, I think, are being able to build your credit history.
- Along with the flexibility that lets you pay things off over time, if you have a major or unexpected expense.
And what about the costs of carrying a card? What should we watch out for?
- Interest payments, for starters.
- Purchases and cash advances, if you don’t pay your balance in full everything, you’re going to pay some interest.
- Annual fees. Some cards charge them, some don’t.
- If you’re earning a lot of rewards with your card, then a $20 to $50 annual fee might be okay.
- But otherwise you should try to avoid annual fees.
- Late payment fees. That’s another charge.
- Just pay on time and you can avoid those.
- Balance transfer fees. Those can be 3% to 5% of any balance you transfer.
- Sometimes those fees are waived during a promotion.
- Foreign transaction fees. That can be 1% to 3% on purchases made with non-U.S. merchants.
- Not every card charges for balance transfers and foreign transactions but you should check out the card before signing up.
Any final advice?
- It’s good to have a credit card. Just make sure you manage it well.
- Pay your bill on time and, if you can, in full every month.
- Keep you balance below 30% of your credit limit. That’s another good rule of thumb.
- Don’t apply for a bunch of cards.
- One is usually enough for most people.
- Check your account online regularly to track spending and protect yourself against fraud.
- And, if you need to build a credit score, use your card once in a while and pay the bill in full.
- Nerdwallet: https://www.nerdwallet.com/article/credit-cards/credit-cards-101
- MoneyWise: https://moneywise.com/a/credit-cards-101
- SmartWallet: https://thesmartwallet.com/credit-cards-101/?articleid=12183