If you're new to the world of credit cards, you probably have some questions about how they work. There's a lot to take on when you start using credit cards, and a lack of knowledge can end up costing you money.
This beginner's guide will cover all the credit card basics. You'll learn exactly how credit cards work, how to choose the best first credit card, and plenty of other information you'll need to know about using credit cards.
A credit card is tied to a credit account with a bank, and when you use the card, you're borrowing money from the issuing bank. You can use a credit card to purchase goods or services with any merchant that accepts credit cards or to take out a cash advance.
Each credit card has a credit limit, which is the maximum amount you can owe the bank at one time. You can use your credit card until you’ve borrowed up to your credit limit.
The amount you have left to borrow is also known as your available credit. After you make a payment, you have more available credit to borrow again.
The amount you owe the bank today is called your balance.
APR, which stands for annual percentage rate, is the annual cost of borrowing money with a credit card. It's the interest rate you pay on charges that you don't pay off within the grace period.
Here's a simple example -- your credit card has an APR of 20%, and you have a balance of $1,000. If you leave that balance on the card and don't incur any fees, then it would grow to $1,200 after one year. In reality, you couldn't leave that balance for a whole year as you'd need to make minimum payments to keep your account in good standing and avoid fees. But that was just an example.
Fortunately, you can avoid interest charges by paying off your card's full statement balance. If you do that, you won't need to pay any interest on purchases you make.
Credit cards can be dangerous if you don't use them responsibly. But if you're smart about credit card usage, you can enjoy a host of benefits and rewards and improve your credit score at the same time. Here's how to use a credit card wisely:
After you're approved for a credit card, it's important to use the card in a way that will improve your credit score. Here's what you need to do to build credit with a credit card:
Beginner credit cards usually come with features or perks that are designed for new users. Here are a few features to look for when choosing the best first credit card:
Many people get their first credit card when they are at college. If you are looking for a good student card, here's our pick of the best credit cards for students.
While you don't need a credit card, there are several reasons why getting a credit card is a good idea:
Since credit cards and debit cards look alike, it's easy to get them confused. To help you tell them apart, we'll take a closer look at their similarities and differences.
Credit cards and debit cards are both physical cards that are tied to a financial account. You can use each type of card to pay for goods or services. The ways you use them for transactions are also the same. For physical transactions, the most common option is to insert your card or swipe it in a card reader. For online transactions, you type in your card information.
Although both types of cards are tied to financial accounts, the accounts they are tied to are different. A credit card is tied to a revolving line of credit that a bank has issued you. A debit card is tied to your bank account.
This is an important distinction. With a credit card transaction, the card issuer pays, and you pay them back later. With a debit card transaction, you pay using funds from your bank account. If you have a fraudulent charge on your credit card, you can call and have that charge removed, and you won't be out any money. If you're a victim of debit card fraud, the bank will need to investigate before it can put the money back into your account.
Because of that difference, credit cards are a more secure payment method than debit cards.
Credit cards affect your credit score, but debit cards do not. When you use your credit card and pay the bill on time, your credit will improve. Paying by debit card does not benefit your credit score in any way.
Secured credit cards are a type of credit card that require a security deposit. They're typically chosen by consumers with bad or limited credit histories who can't get approved for unsecured credit cards.
Although you need to deposit money to get a secured credit card, it's still considered a credit card and not a debit card. You're still borrowing money from the credit card company. The deposit is simply collateral. That also means a secured card can help you improve your credit just like any other credit card.
If you want to start building your credit score using a secured credit card, check out our roundup of the best secured credit cards.
Credit card: A physical card that's tied to a credit account. The card can be used to make purchases through that credit account.
Unsecured credit card: A credit card that doesn't require any security deposit from the cardholder. Most credit cards are unsecured.
Secured credit card: A credit card that requires a security deposit when the cardholder opens the account.
Cash advance: Using a credit card to get cash. Cash advances typically have higher APRs and start accruing interest immediately, so they're not recommended.
Balance transfer: Transferring a balance from one credit card to another, most often because one card has a lower APR. Not all credit cards offer this feature.
Credit limit: The maximum balance a credit card can have. Many credit cards have different limits for cash advances. For example, a card could have a credit limit of $10,000, but a cash advance limit of $3,000. That means of the $10,000 credit limit, up to $3,000 could be used for a cash advance.
Available credit: The difference between a card's credit limit and its available credit. If you have a $400 balance on a card with a $1,000 credit limit, then its current available credit is $600.
Revolving line of credit: A line of credit you can borrow from, up to the limit, as long as the account is open.
APR: The annual percentage rate, which is the annual cost of borrowing money.
Minimum payment: The minimum amount you need to pay on your credit card by the due date. If you don't pay at least this much, the card issuer can charge you a late fee.
Statement balance: The credit card's balance on your most recent statement closing date. By paying this amount in full every billing cycle, you can avoid interest charges on purchases you make.
Credit score: A number that rates your creditworthiness, or the likeliness that you'll repay what you borrow.
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