10 Things You Need to Know About Credit Cards
You may have used a credit card for a while now, or maybe you're a newcomer and the concept is foreign to you. Regardless of your familiarity, there are a few concepts you should know before your next swipe.
1. How does a credit card work?
A credit card is a rectangular piece of plastic, metallic alloy, or graphite, that represents a financial account. On the back of the card there is a magnetic strip, which enables customers to make payments.
As consumers swipe their cards, or enter their card's account number online, they charge purchases to the bank. Banks quickly credit merchant accounts once sales slips are received.
The charges are then assembled and billed to the cardholder at the end of each billing period. The cardholder can either pay the entire balance of their statement, or in monthly installments, a privilege for which they are charged interest. The bank determines a minimum amount of money the cardholder must pay with each statement, or else the cardholder is charged additional fees on top of interest.
2. What's the difference between a debit card and a credit card?
With a debit card, consumers pay merchants for purchases using money withdrawn from their own bank account.
With a credit card, consumers are paying merchants with the issuer's money, which means each month, the cardholder must repay what they spent.
3. Who qualifies for a credit card?
Anyone over the age of 18 can qualify for a credit card, but those who are young and have no income may need a qualified co-signer for the bank to approve the card. Getting approved for a credit card is much easier if the applicant has a steady income, a good credit history, and a small amount of debt.
4. Why should I use credit cards?
It's important to use credit cards because many important facets of your life will be hindered without having established a solid credit history.
Today, in order to get approved for a home loan, or to get approved by a landlord to rent an apartment, you need to have good credit.
Having the privilege of using the bank's money for a short period of time can be helpful if you need to buy food for your family a couple of days before your paycheck arrives, or for other necessities and time-sensitive matters.
5. How do I pick the right credit card?
Assess your needs and your spending habits before you choose a credit card.
You can opt for a credit card that matches all your needs, whether you're prioritizing earning cash back, accumulating frequent flyer miles, or even whether you're starting a small business or starting out as a student.
6. If your credit card has no pre-determined spending limit, it might hurt your credit score.
Let's get one thing straight -- if your credit card requires payments in full every month and doesn't have a credit limit or an interest rate, you're not using a credit card: you're using a charge card. A charge card (many are offered by American Express) does not keep your spending in check the way a credit card does.
There are certain limits the card issuer can enforce, however. For example, if the issuer sees a spike in your spending, they can deny your purchases based on your history and how much they think you can afford.
In terms of your credit score, your charge card won't figure into your credit utilization rate at all, which is the amount of credit you have available from your revolving credit card accounts (a crucial ingredient to your score).
However, the balances on your charge card are factored into the total amount of debt you owe across all your accounts, and if you miss payments on your charge card, not only will you get hit with a late fee, but your credit score will also be damaged.
7. Know what 'grace period' means.
You may not have known that a payment grace period existed. That's because grace periods apply more often to installment loans. In this regard, the term refers to the period of time you have after the due date passes on your payment, to still be considered "on time."
For example, if your payment is due on the 10th of the month, and you have a 10-day grace period, you'll have until the 20th to make your payment without being hit with a late fee or interest.
However, the term means something completely different when it comes to credit cards. A credit card's grace period is how long you can pay your balance in full to avoid being hit with interest on the balance, and must always be received on the due date before 5 pm to avoid late penalties. After that due date, there is no window of time in which you can successfully avoid a fee.
8. Rewards categories can change each year without notice.
Your bank may alert you when they change rewards categories from quarter to quarter. However, the categories can change from year to year without notice.
9. Why do certain stores enforce credit cards minimums?
You may already be a savvy credit card user, and have realized that certain stores only allow credit card use for a minimum amount.
This is because banks get paid by merchants through swipe fees. Each time you swipe your card, a merchant is allowing you to pay them through credit, and as such, the banks charge a fee.
It may not be worth it for a merchant to pay the fee if you charge something minuscule, so this is a merchant's way of making sure their business stays profitable.
10. The first steps to getting a credit card.
If you haven't established a credit history, you'll need a couple of things to get a credit card.
Federal law requires that adults under 21 have verifiable income if they want a credit card without a cosigner. Students enrolled in college are likely to be approved for a student credit card, which most issuers offer.
If you have a steady income and a well-kept checking or savings account, you are a great candidate to apply for a credit card. You can either apply online, or visit a bank branch to talk to a representative who has the authority to get your application approved.