A credit card allows you to borrow money from a bank to make purchases, whether you’re buying a burger or a round-trip ticket to France. As long as you pay back the money you borrow within the “grace period” of 25-30 days, you don’t have to pay extra. If you don’t pay it back in that time period, you’ll have to pay interest — a percentage of the money you owe the bank — on top of what you borrowed.
Credit card pros and cons
|You can make a large purchase now and pay it off in smaller amounts over time.||You can easily dig yourself into debt if you’re not careful about your spending.|
|Carrying credit cards is more convenient (and safer) than carrying a wad of cash, and credit cards are more widely accepted than personal checks.||The ease of using credit cards can cause you to overspend.|
|With responsible use, you can build your credit, which will be important later on.||Missing payments or maxing out a card can sink your credit score quickly.|
|Many credit cards give you rewards, essentially giving you back 1% or more of the money you spend.||Interest can make even a small debt become large over time.|
Choosing a credit card
When you’re deciding which credit card to get, ask yourself this question: Will I be paying interest on my debts?
If you pay your credit card balance in full and on time each month, you won’t be charged interest. In that case, it’s worth it to get a credit card with rewards. These cards give you points, cash or airline miles every time you use them. However, rewards cards have higher interest rates — high enough to wipe out the value of the rewards you earn. That brings us to what to do if you do carry a balance (in other words, you don’t pay off your debt every month). You’ll want to minimize your interest payments, so you should pick a credit card that has a low interest rate.
Your credit card is issued by a bank, such as Bank of America, Chase or Wells Fargo. The bank determines your interest rate, fees and rewards, so it’s important to find a bank that offers a card you like. Transactions are processed on a network, like Visa, Mastercard or American Express. The network doesn’t really affect the features on a card, except for such perks like rental car insurance or price protection. However, the network determines where the card is accepted.
In general, the better your credit score, the better the cards you can qualify for. The most generous rewards rates, the best perks and the lowest interest rates are available to those with excellent credit.
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Interest payments and fees
Credit card companies make money in three ways:
- Transaction fees charged to the merchant every time you use your credit card
- Interest payments when you don’t pay off your debt in full
- Fees, like late payment or annual fees
You don’t have to worry about that first one. Transaction fees are a problem only for merchants. Instead, concern yourself with interest payments and fees.
If you have a rewards credit card, remember that issuers don’t give those points out of the goodness of their hearts. Many people think they earn more in rewards than they pay in interest, but if you carry a balance, that’s rarely the case. If you think there’s a chance you won’t pay off your balance every month, steer clear of rewards cards.
Credit cards charge a number of fees, from an annual fee to cash advance fees to late payment fees. Most cards nowadays don’t have an annual fee unless they offer big rewards or are designed for people with less-than-good credit, but make sure to make at least the minimum monthly payment on time, or you may be slapped with a late fee and a higher interest rate — and you might even see your credit score suffer.
Understanding the costs
Credit card applications and marketing materials come with what’s known as a Schumer box: a chart that tells you the most important information about the card. Here’s a breakdown of how to read the Schumer box.
APR for purchases
This is the interest rate that will be charged on anything you didn’t pay off the month before. It’s charged on a daily basis — meaning that if your APR is 15%, you don’t get charged 15% once a year, but rather 0.0027% a day. Some cards give you an introductory 0% interest period of six months or longer, to get you in the habit of using the card. Taking advantage of these offers allows you to make a big purchase and pay it off over time interest free.
Variable APR: If the Schumer box says your APR is “variable” (and it probably does), that means your interest rate is tied to a base rate called the prime rate, which is controlled by the Federal Reserve. If the prime rate rises 0.25% or 1% or by some other amount, your credit card interest rate will, too.
APR for transfers
If you have credit card debt, you can shift it over to a new card. Some cards will let you shift your debt and not pay interest for 6 to 12 months, but others will charge you the same rate as regular purchases.
APR for cash advances
If you take out a cash advance (that is, you use your card to withdraw cash from an ATM or get money from a bank teller), you’ll be charged this interest rate on the amount you borrow. Unlike regular purchases, where you have a grace period to pay off your debt, you start accumulating interest on cash advances the day you take them.
If you miss a payment, you may have to pay this higher interest rate for up to six months.
“HOW TO Avoid paying interest”
This section tells you your grace period, or how long you have after your credit card statement date to pay off your debt without accruing interest.
Minimum interest charge
If you owe any interest, it will be at least this amount. So if you carry a balance of $1 and your interest rate is 12.99%, you’d normally be charged $0.01, but the credit card company will bump it up to, say, $0.50 anyway.
Exactly what it sounds like. It’s a fee you pay the credit card company to carry their product. Most cards don’t have an annual fee, but they’re common on cards that offer high rewards rates. Cards for people with average or bad credit are more likely to have a fee, as well.
- Transfer fee: If you move debt from one card to another, you’ll usually be charged this fee by the card you moved it to. Fees typically range from 3% to 5% of the amount transferred. A few cards don’t charge a transfer fee.
- Cash advance fee: If you take out a cash advance, you’ll pay this fee on top of the interest that begins accumulating immediately.
- Foreign transaction fee: If you use your credit card overseas, you’ll be charged this fee on every purchase made in a foreign country. Foreign transaction fees are typically about 3% of the purchase. Most cards aimed at travelers don’t charge this fee, and some issuers (notably Capital One and Discover) don’t charge it on any of their cards.
- Late payment: If you don’t pay at least the minimum amount due by the due date on your credit card statement, you’ll have to pay this fee. If you’re more than 30 days late, it could affect your credit score.
- Over-the-limit fee: If you go over your credit limit, the issuer could still approve the transaction but charge you this fee. However, you have to opt in to over-limit coverage before it can do so. Because of that, over-limit fees are rare nowadays.
- Returned payment: If you try to pay your credit card bill and it doesn’t work for some reason (like the check bounces or the transfer from your bank is declined), you’ll have to pay this fee.
Rewards program details
If you have a rewards credit card, this portion will spell out exactly how you earn and redeem your rewards. Read this section carefully. Many credit card rewards programs are fantastic, giving you cash back or points you can redeem for free travel. But others aren’t all they make out to be — paying minuscule rates or giving you rewards only for crummy merchandise you don’t want or gift cards you’ll never use.
If you’re just starting out
To qualify for the best credit cards, you need good to excellent credit. As a result, high rewards rates and low APRs are often out of reach of young people just starting out, whether they’re in the workforce or still in school. If you’re new to credit, you’ll need to work on building your credit first. Here are some options for doing that.
Get a secured credit card
A secured card requires a cash deposit, usually equal to your credit line. The deposit protects the card issuer in case you don’t pay your bill. Since the deposit reduces the risk to the issuer, credit card companies are more willing to give these cards to people with bad credit or no credit. However, when you apply, you’ll still need to show that you have income.
Get a student credit card
Student cards are specifically designed for young people who have a thin credit file. A warning: Simply being a college student is not enough to qualify for a student card. If you’re under 21, you’ll need to show on your application that you have independent income. Once you’re 21, you can report any income you have access to, including your partner’s or an allowance from parents.
Become an authorized user
An authorized user piggybacks on someone else’s credit card account. You get a card with your name on it that you can use for purchases. You’re not legally on the hook for making the payments, though; the primary cardholder is responsible. Many issuers report authorized user activity to the credit bureaus, which can help your score.
Find a co-signer
A co-signer is someone who promises to pay your debts if you don’t pay them. Usually it’s a parent or friend. Some issuers allow co-signers, some do not.
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