Category: Credit Cards

How Credit Cards Work and Do You Need One?

There are a surprising number of people who don’t really know how credit cards work, and it is important information for every adult to have. A credit card can be your best friend or your worst depending on how you choose to use it. There are many different cards to choose from, so you will also need to know how to select the right one. The more you learn about credit cards, the easier it is to use them properly and avoid spiralling into debt.

The Basics

A credit card essentially lets you borrow money up to a certain amount (your limit). Interest will be tacked onto the amount you owe until you have completely cleared the balance on your account. Your credit limit is determined by a few different factors, including your credit history and how much you make.

You will agree to a certain interest rate for your card before signing the contract. Keep in mind that the rate you get may not be the one you saw advertised. These companies only have to give advertised rates to 51% of the people whose applications are approved.

Each month you will get a bill for what you owe. Your bill will detail all of your purchases, so you can see everything that you bought. There is a grace period where you don’t have to pay any interest. This period is not the same for everyone, so make sure that you look at the terms of your contract. Some people have a grace period of 20 days while others have over 50 days.

There will be a minimum amount that you will be required to repay every month. You should make an effort to pay more than this amount so you can get your account cleared as soon as possible. A lot of people slip into debt because they only pay as much as they have to.

Finding the Right Card

It is important to find the right credit card to match your specific needs. A lot of these cards will have very attractive offers, but you must be careful. Take the time to read the terms of each card before settling on one in particular.

You must talk with the provider to set up a limit that is realistic and fair. There are some credit cards marketed specifically towards students that you might want to look into. The more research you do, the more likely you’ll be to get what you need.

Boost Your Credit Rating

A credit card can help you increase your credit rating fairly quickly, but only if you use it responsibly. Those who are late making payments on their card will find that their credit score is going to suffer as a result. There are some cards that are better than others for this purpose, so you should look into your options before choosing.

Tips for Using Your Credit Card Responsibly

There are a number of tips that you should follow that can help you use your card responsibly, such as:

  • Avoid cash withdrawals: You should always try to avoid cash withdrawals, as they tend to come with some hefty fees. Withdrawing money from an ATM with a credit card can cost you a lot of money. This can be very tempting, but you should think twice. There is no grace period with cash advances, so you’ll have to pay interest on whatever you take out. Most cards charge 2-3 percent for every foreign currency exchange, so keep that in mind as well.
  • Don’t go outside of your limits: Make sure that you always stay within your credit limit. Even if you have bad credit. When you go outside of your limit, you will be charged a fee (and usually not a small one). You will need to know what your limit is so you don’t go over it by accident.
  • Never use it for impulse purchases: The worst thing that you can do with a credit card is to use it for impulse purchases. You should really think before putting anything on your card.
  • Pay your balance on time: While some people might not think that being late a credit card payment is a big deal, it can quickly become one. Make sure that you take care of your balance as soon as possible so it doesn’t get the better of you.

A Credit Card isn’t Free Money

A lot of people treat their credit cards like free money, but you will eventually need to pay off what you spend. If you pay off your balance before the grace period is up, you won’t have to pay any interest. Getting the right card can go a long way towards helping you get what you need with little to no additional charges.