That shiny piece of plastic you’re eyeing — your future credit card — may become your best friend, but it may also become your foe depending on how you use it.
Unfortunately, in many cases, credit cards become consumers’ worst enemies. It doesn’t have to be that way for you, though, if you understand the principles in this credit cards 101 guide.
Research shows that around 201 million U.S. consumers in Spring 2017 had used at least one credit card during the past three months. So, if you’re itching to use a credit card this spring, you’re not alone.
If you’re new to credit cards, before you sign up for a card, take this credit cards 101 course. Here is a guide to all things credit cards.
Let’s get started!
Credit Cards 101: What Credit Cards Are
Credit cards are convenient tools for making payments. For instance, maybe you want to purchase a $1,000 laptop. You don’t have to take this much cash with you to the electronics store — simply pull out your credit card.
Credit cards are also excellent tools for building credit. You’ll need a solid credit score to buy a house and enjoy the best interest rate on a car loan, for example.
Finally, the use of credit cards is a relatively secure method of payment. After all, today’s credit card fraud departments are quite robust. On top of that, you likely won’t be held responsible for any fraudulent transactions made using your credit card.
Now, let’s go over what credit cards are not.
What Credit Cards Are Not
Credit cards are not free money.
Let’s repeat that one more time: Credit cards do not equal free money.
When you use your card to buy an item — large or small — you will have to pay for this purchase at some point. On top of this, you’ll end up paying interest if you retain a balance on the card from one month to the next.
Also, credit cards are not debit cards. That means using a credit card will not trigger the immediate removal of money from your checking account. In addition, credit cards aren’t ATM cards, so don’t use them at ATMs unless you’re okay with paying cash advance fees.
Finally, credit cards do come with limits. So, just as you would with cash, you need to be smart about how you use the credit you have available.
Now, as part of this credit cards 101 course, let’s take a look at a couple specific types of cards.
Unsecured Credit Card
This is the most common credit card type available today — the kind you’re probably the most familiar with.
Because they are unsecured, this means they aren’t directly linked to any property that the credit card company can seize if you fail to make payments. Instead, a credit card company has to use garnishments or the civil court system to collect debts that have not been paid.
You can qualify for an unsecured card based on your credit history, earnings potential, and financial strength.
Secured Credit Card
This type of credit card may come in handy for those who’ve had turbulent past credit histories and cannot receive approval for unsecured credit cards. They are essentially part credit cards and part debit cards, using a mixture of lenders’ credit lines and your personal funds.
Here are a few essential questions to pose before you sign up for a secured card:
- How large your security deposit must be to open your account (a deposit of around $99 is not uncommon)
- How high your credit line will be in relation to your security deposit
- How high your cash withdrawal and late fees will be
- How large your annual credit card fee will be (you should avoid cards that come with annual fees)
- What the card’s APR, or annual percentage rate, is and whether you can lower it by making on-time payments
- If you can pay off your balance on time to avoid interest
- If perks, such as points, can be earned by using your card
- How rapidly you can increase your credit limit if you make payments on time
- Whether you can eventually transition to an unsecured credit card
Once you choose a secured card, following a few steps is critical for ensuring that it helps — rather than hurts — your credit score long term.
First, be sure to utilize your secured card each month. If you put it to use frequently and pay your balance off each time, you’ll attain a better credit score. Avoid paying extra money in the form of interest and ATM fees at all costs.
Also, even if you receive a boost in your credit limit, try to avoid going near your credit limit, as this can have a negative impact on your credit score. The goal is to keep your balance at 30% below the amount of credit you have available. For instance, if you’ve got $1,000 worth of credit available, try to spend no more than $300.
In addition, try to avoid requesting too many secured credit cards. The more you seek them, the more frequently lenders access your credit history. These inquiries can cause your credit rating to drop.
Other Credit Cards 101 Tips
Exercise caution when you share information about your credit card — whether you choose a secured one or an unsecured one. Chances are that you’ll experience fraudulent activity at some point no matter how careful you are. But the more proactive you are, the safer you’ll be.
Also, don’t forget you have your credit card on you and thus neglect to use it. After all, lenders may discontinue inactive cards. At a minimum, you can easily use your card to purchase a small coffee once a month and then pay it off using an automatic payment set up so that you’re never tardy in paying your bill.
How We Can Help
We offer a wide range of credit card and personal loan options for consumers, particularly those interested in repairing their credit histories.
Contact us to find out more about how we can help you to solve your financial issues and take control of your financial future.