What Should I Know About Credit Cards?

Credit cards can be an overwhelming subject to navigate due to the many confusing terms and options that are out there. A credit card is like a loan that the credit card companies will give you that you must pay back. The interest rates for this type of loan are very high, sometimes exceeding 20% annually which makes it easy for credit card holders to quickly rack up debt. So, what are the terms and processes you should know before getting a credit card, what are the pros and cons, and what kind of credit card should I pick?

Terms and Processes

  • Account Statement is a document that shows all the transactions on your card during a specific amount of time (normally 1 month). 
  • Annual Fee is a fee you will pay to use the credit card (some fees are monthly, and some do not have any fees).
  • Annual Percentage Rate (APR) is the interest charged for not paying your balance in full by the specific payment date. It is important to know.
  • Automatic Payment is an option you have that can pay your balance in full on or before the payment date (this is a great way to avoid interest payments).
  • Available Credit is the amount you are permitted to spend on your card, you can calculate this by subtracting your current balance from your credit limit (see credit limit).
  • Balance is the amount you have spent on the card.
  • Credit Limit is the maximum amount you are allowed to spend on your credit card during a specific period.
  • Credit Report is a record of all your credit history, which includes your credit card use but is not exclusive to your credit card.
  • Credit Score is a number assigned to you based on your information in the credit report. An excellent credit score is usually 800 and up and a poor credit score is below 600.

Note: This list includes some of the most important terms with which you should be familiar although not every term associated with credit cards is included.

When you first apply for a credit card, a credit card company will check your credit report and credit score to evaluate if they should approve you for a credit card and to determine what your credit limit will be. If you are denied, they will tell you why, and if you are approved, they will send you the new card. Once you receive the card you will need to activate it. For convenience, many cards can be checked via an app associated with the card. The card issuer will give you lots of information on what your APR is, what your credit limit is, and if there are any annual fees. Once you activate your card you can begin using it. After your first purchase, you will notice a balance on your credit card in the amount of what you purchased. It is important to pay off that balance before your payment date (which can be found online or in your app) so that you can avoid expensive interest charges. Normally, you can set up automatic payments after you receive your first account statement. The 30% rule says that you should not use more than 30% of your credit limit because it could hurt your credit score. This means if you have a $1,000 credit limit your balance at any given time should not exceed $300.

Pros and Cons

As with most things in life, there are positives and negatives to having a credit card. A pro would be that it helps you build your credit report and score if you use it responsibly. Responsible use of a credit card would be paying off your balance before its due date to avoid any buildup of interest and debt. A con would be that it is an easy way to create debt for yourself. You must understand your personality, if you know it would be difficult to manage your spending with a credit card, it is probably best to have someone keep you accountable or avoid getting one altogether. Another pro is that there are often rewards like cashback that come with credit cards. Another con would be the potential fees you have to pay related to the card. A positive to credit cards would be that they are normally safer than debit cards. If fraud occurs, debit cards have direct access to your bank account where credit cards do not. Another negative to credit cards would be the very high-interest rates you may have to pay if you do not pay your full balance by the due date. It is important to assess whether you think a credit card would be beneficial or harmful to your finances. 

Choosing a Credit Card

There are many options for picking a credit card which can make for a difficult decision. For college students, look for credit cards that do not require a specific credit score. These cards are often meant for students who are trying to build their credit. Another thing to look at is the rewards, and whether they are applicable to your spending habits. Look at how many and what fees are associated with a particular credit card. Using a credit card like a debit card will help you avoid debt, but you want to look at the interest rate to see how much you will be paying if you miss a payment. If you need more help with anything talked about in today’s article or anything related to your finances or goal, schedule an appointment with the NEXUS Financial Discipleship Center here: https://ronblueinstitute.com/schedule-an-appointment/.

References:

Bank of America Credit Card Glossary. n.d. https://www.bankofamerica.com/credit-cards/glossary/. 7 April 2022.

Tsosie, Claire. Nerdwallet. 7 January 2022. https://www.nerdwallet.com/article/credit-cards/things-to-know-first-credit-card. 7 April 2022.