There are a lot of reasons why you would consider replacing your cash with a credit card. Some users find it easier to carry plastic instead of paper. Others prefer the speed of credit card transactions. Whatever your reasons might be, there is a lot you need to learn and understand about credit cards.
This is everything you need to know before you search and apply for your new credit card:
Credit Cards: Definitions and Common Uses
A credit card is a plastic card that is used as a payment method. The user, also known as a cardholder, gets a credit card from a card issuer, which is usually a bank. Credit cards differ from similar payment methods such as debit cards in that they allow people to borrow funds from banks.
The two main uses of credit cards are:
- 1. Paying for goods and services without any cash.
- 2. Borrowing funds in the form of a cash advance.
With a credit card, you are paying for goods and services by borrowing funds from your card issuer. You can think of it as getting a short-term loan – the issuer pays for your purchase at the point of sale, and then you pay that amount back to the issuer, plus interest and any additional agreed-upon fees.
A credit card is among the most popular payment methods for buying consumer goods and services. Paying with a credit card instead of cash is especially convenient if you don’t have cash on hand or simply don’t like using it for your transactions. It’s also very useful in terms of tracking and security.
Alternatively, you can use a credit card to borrow funds from your card issuer in the form of a cash advance. Most card issuers grant a line of credit (LOC) to cardholders, enabling them to do that. Depending on your credit rating, your credit card will probably have a pre-set cash borrowing limit.
Benefits of Credit Card Uses
The benefits of credit card use range from the aforementioned convenience and security to special rewards. Your credit card can help you build or improve your credit score, provide you with different types of insurance, unlock discounts for airline tickets, earn significant bonuses, and so much more.
When you start using a credit card, you can expect the following:
- Signup bonuses, which can be worth anywhere from $50 to $250.
- Bonus points that you can redeem for gifts cards or other rewards.
- Frequent-flyer miles, usually one mile per dollar or two dollars spent.
- Greater protection from credit card frauds and botched paid services.
- The grace period, which allows you to postpone your payments.
- Different types of insurance, usually travel and rental car insurance.
- Universal acceptance, which means no loss on currency conversion.
- Credit score building, which helps you with loans and job search.
Types of Credit Cards
Different card issuers offer many different types of credit cards. You shouldn’t let this confuse you. These cards are usually custom-tailored to fit specific cardholders’ needs, but all of them essentially fall under the same ten categories. These are the 10 most commonly used types of credit cards:
Standard “Plain-Vanilla” Credit Cards
Offering no bonus points and rewards, standard credit cards are easy to understand. Once you’ve used up your credit on purchases, you pay your credit card bill and receive more credit on your card.
Balance Transfer Credit Cards
Balance transfer credit cards allow you to transfer balances at a more affordable rate than other types of credit cards that offer the same ability. They often have time-limited low introductory rates.
Rewards Credit Cards
With rewards credit cards, you collect points on credit card purchases that you can later exchange for cash (cashback rewards credit cards), gifts (points rewards credit card), or travel-related discounts.
Student Credit Cards
As their name suggests, student credit cards are designed for young adults without any credit score or history. Most card issuers require applicants to be enrolled at an accredited four-year university.
Because charge cards don’t have any pre-set spending limit, they require a strong credit history. In order to use this type of card, you also need to pay your balances in full at the end of every month.
Secured Credit Cards
Secured credit cards are a good option for people who have a poor credit score or don’t have any credit history at all. They are obtained with a security deposit and come with a credit limit equal to it. See Best Secured Credit Cards.
Subprime Credit Cards
In case your credit score is that bad that you can’t apply for a secured credit card, the only option you have is a subprime credit card. However, you should expect high interest rates and confusing terms.
Prepaid cards are similar to debit cards in that a cardholder doesn’t borrow money from the issuer, but withdraws funds from their own deposit instead. The amount you load is the amount you spend. See Best Prepaid Debit Cards.
Limited Purpose Cards
Unlike other types of credit cards, limited purpose cards are not universally accepted. They come with a minimum payment and finance charge and can be used for buying designated goods/services. See Best Shopping / Merchandise Cards.
Business Credit Cards
Business credit cards are aimed at business owners who want to keep their private and professional transactions separate. Nevertheless, your private credit history will still be taken into consideration.
Other Not So Popular Types of Credit Cards
Interest Rates, Fees, & Other Expenses of Credit Card Use
Regardless of its specific type, every credit card comes with a certain interest rate, credit card fees, and other expenses. Understanding how card issuers calculate these fees will help you not only choose the best credit card for your needs but also manage your card payments and expenses better.
Credit Card Interest Rates
One of the key features of your credit card, the interest rate is calculated and expressed as an annual percentage rate (APR). Depending on the card issuer and the type of credit card, there are two main types of credit card interest rates – fixed and variable – in addition to other different types of APRs.
Unlike fixed interest rates, which can only change in certain circumstances, variable interest rates will always vary depending on some different interest rate. In addition to that, your credit card can also have different APRs for your different balances, as well as a periodic rate for a period less than a year.
Common Credit Card Fees
If you look at your credit card agreement, you’ll see that your credit card issuer takes a number of additional fees here and there. Most of them you can avoid, like cash advance fee, a finance charge, or expedited payment fee. Others, like annual fee and balance transfer fee, usually can’t be avoided.
Credit card fees and additional expenses depend solely on the card issuer, which is why you should take your time and compare offers before you sign an agreement. For example, some issuers don’t charge an annual fee at all, while others charge their cardholders anywhere between $20 and $500.
Using Multiple Credit Cards
Carrying multiple credit cards makes sense only if you use them for bonus points and rewards with different types of purchases. For instance, you can combine a frequent-flyer mile credit card with a travel rewards credit card and save money on family vacations with cheaper airfare and hotel stay.
Otherwise, you’d only be dealing with too many balances and bills.
In addition to that, holding multiple credit cards can be bad for your credit score.
If you decide to apply for multiple credit cards anyway, you should at least make sure to pick them carefully. Choose cards without annual fees and don’t carry a balance. Also, do your best to pay your credit card bills on time, or you’ll have to deal with the additional expenses in the form of late fees.
Protecting Yourself from Becoming a Victim of Credit Card Fraud
There are many threats, online and offline alike, that endanger the security of your credit cards. The fact that your money is not directly compromised is one of the greatest benefits of credit cards, but that still doesn’t mean that you cannot fall victim to credit card frauds. Here’s how to stay protected:
- Keep your credit cards safe from thieves and criminals.
- Generate strong passwords and don’t write them down.
- Shred every document with your credit card number.
- Never sign credit card receipts that are blank or blurry.
- Give your credit card information only to trusted people.
- Learn to avoid online scams such as social engineering.
- Go through your credit card billing statements each month.
- If your credit card gets lost or stolen, report immediately.
Credit Cards Frequently Asked Questions
In order to get your own credit card, you need to meet certain criteria. Persons under 18 can only get co-signed to an adult’s credit card; they cannot owe one by themselves. More importantly, you need to have at least some credit score to be eligible for a credit card.
Credit cards are plastic, electronic payment cards that allow you to buy product and services, get cash advances, and pay off debt on other credit cards by borrowing money from a card issuer under one condition – you need to pay back the issuer at the end of each month.
Paying with credit cards is extremely convenient because it’s similar to getting a short-term loan. In addition to being fast and secure, credit cards also come with special perks and benefits such as discounts and cashback. They are especially useful for online shopping.
In order to apply for a credit card, you’ll need to gather the following documentation:
- Identity proof
- Address proof
- Income proof
- Age proof
After you’ve checked your credit score, determined what type of card you need, and chosen a credit card issuer, you need to submit an application for a new credit card. You can do this in a branch, via phone, or online. The issuer will accept or deny your application based on your credit report.
Persons interested in applying for a credit card must be at least 18 years old. Anyone younger than that can get co-signed to an adult’s credit card, thereby becoming an authorized user.
Having a credit card should be able to improve your credit score, under the condition that you are a responsible cardholder. This means that you need to pay your credit card bills in full and on time, as well to keep your monthly spendings well under your pre-set credit card limit.
Different types of credit cards come with different pre-set limits. This amount is determined by your credit card issuer based on different factors such as your income, your debt-to-income ratio, your credit history, and the pre-set limit on your other credit cards (if you have any).
Yes, you can avoid paying interest charges on your credit card for as long as you pay off purchases in full by the time your monthly statement is due and stay away from cash advances. To avoid interest on balance transfers, you should pay off your debt within the introductory 0% APR period.
Being a cardholder doesn’t have to cost you anything at all, but it can also cost you hundreds of dollars on a monthly basis. This depends on the type of credit card and the issuer you choose, but also on how many penalties and additional fees your credit card behavior triggers.
Yes, a credit card limit can be changed. If you are a responsible cardholder, most credit card issuers will increase your limit every 6 to 12 months. In case you can’t wait for that long, you can submit a request in a branch, via phone, or online.