Credit Cards

Credit cards are common methods of payment that are accepted almost universally these days.

 

 

 

 

 

 

You might choose to use credit cards so you can avoid carrying cash all the time. Alternatively, you could use a credit card for a larger expense when you do not have funds available right away. While they can be highly beneficial, failing to pay off your credit cards can also cause a serious financial problems both now and in the future.

When you use credit cards well, you can take advantage of perks like travel rewards and discounts on partner purchases. The type of credit card you get will dictate the types of bonus offers you might receive, but there are many different options out there. Knowing how credit cards work and how you can best benefit from them will help you to make the right decision for your financial future.

How do credit cards work?

Understanding the basic principles of using credit cards can help you to avoid difficult situations once you begin using them. There are a few concepts you need to be familiar with, especially the following:

  • Interest Rates: When you use a credit card, you are borrowing money from the card company that you must pay back. If you do not pay it back right away, then you will likely start to see interest being added to the total amount you owe. The interest rates will vary based on the type of card and the policies of that company, so be sure to review the interest rate before signing up to any card. Rates might range from four to 30 percent and can even compound each month.
  • Annual Fees: Some credit cards also charge annual fees for you to use them. These cards typically offer very enticing benefits to card users, including free airline travel and hotel bookings. Annual fees can range anywhere from $25 to $500, so be sure to review these details carefully. Sign-up offers might include waiving the annual fee for the first year, which could be helpful getting started.
  • Transaction Fees: Be sure to check if transaction fees are included in the cost you will pay for any product or if they are added to your fees. Most companies that allow you to use credit cards will pay the transaction fee on your behalf, but some might add it to your total. These companies will usually encourage cash payment instead.
  • Late Penalties: Each month, your credit card company will give you a statement indicating the total amount owed, as well as a minimum payment amount. You must pay at least the minimum payment, although you should try to pay off the full amount every month. If you do not pay the minimum amount on time, you will inevitably be charged a late penalty fee on top of your amount owed and interest charges.

Understanding how credit cards work can help ensure you do not fall into any financial troubles by borrowing more than you can pay back. You should always know the exact terms of a credit card before signing up with any company. For example, sign-up bonuses often come with minimum spend amounts within a set period of time. Knowing all the terms can help you to best benefit without the risk of overborrowing.

How to Choose a Credit Card

There are many types of credit cards available, so choosing the right one for you can seem like a confusing process. The type of card you should choose is based primarily on your financial history and your current level of debt, if you have any. Knowing your financial behavior can help you to determine the best type of card for you.

Standard Credit Cards

A standard credit card will be available to those with a good credit history, usually at a decent interest rate offer. Some might even offer lower interest rates for the first six months or the first year, but always be sure to verify these terms and conditions.

Secured Credit Cards

A secured credit card can be a good option if you have no credit history yet or if you have poor credit. These types of cards actually work more like debit cards because you will have to deposit money into an account before you can use it. Lenders prefer these types of cards until you can build up better credit, so this is a good starting point to getting standard cards eventually.

Business Credit Cards

A business credit card is a good idea if you own your own business that incurs regular expenses. If you get a business credit card, then be sure to only use it for business expenses specifically. These could include inventory or business-related travel, but you should be careful not to use your business card for personal expenses.

Student Credit Cards

A student credit card often comes with an introductory, lower spend limit as well as a lower interest rate. These cards are often associated with partners offering discounts on relevant purchases, such as internet services or school supplies. These are a good idea to start building your credit, but never overspend on your card when you cannot pay it back immediately. If you also have student loans, you will need to ensure you can pay your credit card bills and student loan bills once you graduate, so it is wise to never get into credit card debt during your student years.

Credit Card Benefits

Using a credit card can offer many benefits, but only when you use it carefully and correctly. Many cards offer rewards programs for using their services, including cash back or points to use toward specific purchases. The types of benefits you can get will vary based on your qualifications for certain cards, so improving your credit score is a great way to obtain better benefits.

Credit cards that are associated with specific companies can offer incredible loyalty programs. For example, getting a credit card through a specific hotel or airline that you frequently use could help you to earn enough rewards for free flights or free hotel stays. Credit cards associated with stores that you frequently shop at could provide you with free products that you would buy anyway. Just be careful to review the benefits and costs of these loyalty programs, since some will have higher interest rates and fees than standard cards.

Using a credit card carefully can help you to build good credit so you can get better rates for big loans, such as for a car or a house. Good credit scores are primarily based on your ability to borrow money and to efficiently pay it back. This shows a lender that you are a safe borrower.

Using credit cards to pay for your monthly bills and regular purchases, knowing that you must pay that bill in full each month, can help you to build a steady credit history. Setting up automatic payments from your bank account to your credit card can be a great way to make sure you do not accrue any interest while benefiting from the credit card bonus offers, as well as building good credit.