(Credit Card guide) How To Master Credit Cards

Having a credit card can provide you with numerous benefits, such as a quick way to build up credit and consumer protection. If you use your credit card poorly, it will ruin your credit, which will affect your ability to borrow money from banks later on. It’s ideal to learn how credit cards work to get them to work best for your individual goals.

Basics about credit cards

What is a credit card?

A credit card is a metal or plastic card that gives you access to a line of credit provided by the bank that issued the card. Each time you purchase something with that credit card, you’re borrowing money from the card issuer to cover that purchase. You now have to pay that money back, either over time or in full at the end of the month.

How do credit cards work exactly?

Once you’re approved for a credit card, the bank authorizes a credit limit—the maximum you can borrow—which is to be used as you decide. Your credit limit is determined based on factors like your income, your other debts, and the available credit that you have currently on other cards.

The payment networks—Mastercard, Visa, American Express, and Discover—process credit card transactions. They ensure that the money for the purchase gets to the merchant and that the right cardholder gets billed.

As soon as your bill shows up, you have the choice of paying a specific minimum amount, paying the whole balance, or paying an amount in between. The most expensive option is to just pay the minimum amount since you will have to pay the most interest. It is best to pay in full each month; you will get a grace period that ensures you avoid paying any interest on purchases at all.

The credit card issuer reports your payments to the available credit bureaus; these companies prepare your credit reports. 35% of your credit score is related to your payment history; a three-digit number shows how risky it is to lend you money. To avoid potential damage to your credit score, you need to pay at least the minimum amount by the due date each month.

How are credit cards different from other cards out there?

A prepaid debit card is not connected to a checking account; you add money to the card, and you can only spend as much as is loaded onto the card. These cards will frequently charge fees you might not pay with a normal debit card.

Prepaid debit cards do include some protections and some limitations. Some prepaid debit cards do not offer mobile banking or ATM access. Not all merchants accept prepaid debit cards as well.

A debit card is tied to your checking account; purchases with a debit card automatically take money out of your account. Rather than borrowing money, you are using your own money to pay for things. Some debit cards earn rewards, but this oftentimes does not measure up to the rewards that come with a credit card. Debit cards also carry weaker fraud protections.

Credit scores will not be affected by the use of debit cards or prepaid cards because neither of them involves borrowing money. A credit card is the only thing that will affect your credit score.

Types of credit cards

Rewards

Rewards credit cards give you something back for each purchase you make with the card. Often, these cards require you to have good credit. They are available in many different types:

• Hotel and airline credit cards help you earn points and miles that can be redeemed for free stays at hotels and free flights. How you redeem your rewards on these cards might be subject to restrictions, such as dates when you can’t travel.
• General travel cards give you points that you can use to pay for any travel expenses. They provide more options than branded airline or hotel cards.
• Cashback cards give you money back for your purchases. The cash can be received as a deposit into your bank account or as a check.
• Store credit cards Earn rewards for your loyalty by getting discounts and various benefits for shopping at the store that gave you that card.

Who are reward cards best for?

Reward cards are ideal for those that pay their balance off every month. If you carry any balance on the interest rate will quickly chip away at any value of the rewards.

Low Interest

Low-interest cards don’t provide any rewards; however, they help you by providing a lower interest rate, making it less costly when it comes to carrying a balance. Often the cards start with a 0% introductory APR period; this gives you plenty of time to pay off a large purchase without any interest. You will most likely need good credit to qualify.

Balance Transfer

A balance transfer credit card lets you move your debt from one issuer to another to take advantage of a lower interest rate. Usually, these cards require excellent or good credit.

Cards for average or bad credit

Credit card options for anyone with bad credit are limited. The cards usually have fewer rewards and higher interest rates. You can use the cards to increase your credit so that you can be eligible for better offers later on.

For those who have bad credit, your best choice is to get a secured credit card. The cards need you to put in a security deposit that you can get back if you close your account or upgrade it to a regular, unsecured card. The secured card is less costly than unsecured credit cards for bad credit, which usually charge high fees that you do not get back.

A good card for average credit will not charge an annual fee and might offer some rewards with a fee.

Why should you get a credit card?

Debit cards don’t require you to borrow money and won’t build up your debt; however, they do not help you build up a credit history. Building up your credit is one of the key benefits of using a credit card. Below are some more features:

• Sign-up bonuses. The bonus can be very useful in helping you start an emergency fund (in the case of a cashback card) or be used for taking a trip.
• Ongoing rewards: rewards that give you some of your money back.
• Building credit: Building a good payment history can help when you want to borrow money in the future at a lower rate.
• A 0% introductory APR period: This helps you avoid interest on purchases or balance transfers during a given promotional period.
• Flexibility: Ideally, you want to be paying your interest in full each month; however, using a credit card will allow you to pay for some of your purchases over a longer period, which will help you handle major purchases.

Costs that come with carrying a credit card.

Credit cards carry some costs, but you can avoid most of them if you use them reasonably. This includes:

• Interest payments: Credit cards can come with various APRs and interest rates for purchases, balance transfers, and cash advances. If you pay in full each month, you will not incur any interest.
• Annual fees: Some cards will charge you an annual fee, ranging from $30 up to $100+. This annual fee can be worth it if the card is giving you more rewards and perks than it is costing you.
• Late payment fees: This fee varies by the card issuer; however, federal regulations put a limit on how high late fees can go. Late fees can’t cost more than the minimum payment that is due.
• Balance transfer fees: Balance transfer credit cards charge around 3% to 5% of the amount of debt that is transferred. If you transfer the debt within a certain time frame, some cards will waive that fee.
• Foreign transaction fees: Many cards add a surcharge of 1% to 3% on purchases that are made with non-U.S. merchants. Travel credit cards usually don’t charge these fees, and some issuers don’t charge them on any of their cards.

How to Use Your Credit Card Effectively

The benefits of responsibly using credit cards outweigh the downsides. Here are some things to keep in mind when it comes to using credit cards:

• Make sure to pay your bill on time and in full each month.
• Wait at least six months between your credit card applications.
• Inspect your account weekly to avoid fraud and track your spending.
• Maintain your balance under 30% of your available credit.

How do I find the best credit card?

No single card is better than the rest of the cards in every single category or for all individuals. If you understand your potential options and ask the right questions, you can narrow down which credit card is the best choice for you given your spending habits and specific credit situation.

Here are three steps to follow to find the best credit card for you:

Figure out your credit.

Find out what your credit score is to see what credit card offers you can apply for. The higher your score, the better chances you have of being approved for credit card applications that come with better features.

Here are some ways to check your score:

Find your FICO score from Discover at CreditScorecard.

Check your credit score for free weekly at AnnualCreditReport.com.

Make sure to check your credit report to see if there are any issues if the number is not what you expected. Next, you decide if you need to take measures to fix your credit report number if it’s higher than you thought by disputing the error or changing your spending habits if need be.

You are entitled to one free copy of your credit report from each of the three major bureaus every 12 months. You can get your free report at AnnualCreditReport.com, a federally authorized site.

Ask the right questions to narrow down your choices 

For low-interest, 0% APR, or balance transfer cards:

• How long does the 0% APR period last, and what is the ongoing interest rate? Find a card that gives you plenty of time to pay off any debt interest-free. Think about getting a credit card with a low ongoing APR if you plan to carry a balance over many years.
• What is the card’s balance transfer policy? Search for the card’s balance transfer fees if you are thinking about doing a balance transfer. See what types of debt you can transfer over and whether there’s a set limit on how much you can send over. The balance transfer APR on a card might be different than the purchase APR.
• Does this card offer any rewards? You might be able to find a card that gives out a decent ongoing reward instead of going for the one-time sign-up bonus reward if you only need a few months of 0% APR to square away your purchase.

For secured credit cards and students:

• Can this card help me build up my credit? Does this card report my credit card payments to the three major credit bureaus? A lot of secured cards do not do this.
• How much is it going to cost to start an account, and does it include an annual fee? Are the rewards on the card big enough to justify the annual fee? You can usually avoid the annual fee if you have good credit. If you are trying to get a secured card, it’s recommended that you get one that requires a low-security deposit. Although this might affect your credit limit, that is often tied to the size of the deposit you make.
• Can I get a better card in the future? Pick a card that lets you build up your credit and then upgrade to a card that has more competitive terms. This will make it easy to have your card open longer and boost your average age of accounts in the long run.

For cash-back cards and rewards:

• How should I spend my money? Find a card that gives you the highest rewards for the categories you spend the most on. If you spend a lot of money, think about getting a card that comes with an annual fee if the rewards earnings would cover the cost of the annual fee. If you are looking to use the card abroad, consider getting one with no foreign transaction fees and chip and pin capability rather than the chip and signature technology that is common in the U.S. This includes other types of cards as well.
• Is this credit card confusing? Consider getting a card with a flat-rate cash-back reward if you do not want to mess with spending caps, rotating bonus rewards, loyalty tiers, and limited award seating.

Apply for a credit card that has the highest overall value

It is simple when it comes to narrowing your choices down to two or three. It gets difficult when you have to narrow your card selection down to the best of those options, however. To solve this dilemma, you need a way to determine the tiebreaker.

Search through the differences in the cards closely. Below are some things that might set the cards apart regarding what they have to offer.

For rewards, travel, or cash-back cards

• There is no expiration date on rewards. Some cards let you use the rewards as long as they are kept open.
• Lower required spending. The lowest spend required for a sign-up bonus is ideal.
• For low-interest, 0% APR, or balance transfer cards:
• Debt payoff planner. Some card issuers help you create your debt payoff plan in an online portal; it’s a very helpful tool if you’re currently struggling with a good amount of debt.
• There is no penalty for APR or late fees. Some cards waive these fees. This could be very helpful if you are behind on these payments.
• For student and secured cards:
• Interest is paid on your deposit. Some secured cards put your security deposit into an interest-earning CD. This is a good way to earn a little money.
• Automatically increasing the credit limit. Some cards will let you raise the limit after a few consecutive on-time payments.

Using a credit card responsibly is a simple and productive way to build good credit. You will be glad you did this when you can borrow money more affordably later on. Make sure to take your time and find the best credit card for your given situation.

Ideally, you want to pay your credit card bill in full each month. Also, you want to make sure you are sticking to your debt payoff plan if you manage to get a good 0% APR deal.