Credit cards can be a great tool to have in your financial tool box, if you know how to use them correctly. Too many people use credit cards as an extra source of income, which leads to piles of credit card debt. If used properly, credit cards can not only get you out of debt, but can make you money in the end.
Credit cards don’t seem like a complicated concept, yet there are so many little things about credit cards that most people don’t understand. Here are some quick explanations of the key points of credit cards and how they work.
Your credit limit is the maximum amount of money you are allowed to charge to the credit card. The higher your credit limit, the more credit worthy you are to your credit card lender.
Your APR is your interest rate. It stands for Annual Percentage Rate, which means it is the rate you are charged over the span of a year, but credit card lenders actually charge you interest every day.
How is the daily interest figured out? Your APR is divided by 365 to get your daily interest rate. That rate is multiplied by your balance to get your interest total for that day, which is added to your balance. So your balance hypothetically increases every day you don’t make a payment.
Do I have to make a payment every day? No. Credit card lenders generally give you 21 days from the date of purchase to pay your balance. If you make the payment within the 21 days, you won’t be charged the daily interest on that balance.
This shows how quickly credit card interest can add up if you have a large balance, which is why it is smart to pay off your balance as soon as you are able to.
A balance transfer is when you move the balance from one credit card to another credit card. Most people do this to avoid high interest rates, by moving a balance from a high interest rate card to a lower interest rate card. Most credit cards charge for balance transfers, which is generally a percentage of the balance that you are transferring.
The annual fee is the fee that some credit cards charge for using the card. Many credit cards have done away with annual fees, but the credit cards that offer more perks tend to still have annual fees, some as high as $500 a year. Unless the perks are outstanding, there is no point in picking a credit card with annual fees.
Your minimum monthly payment is the lowest payment you can make without being hit with a late fee. Paying it does not stop interest from being charged on your account balance. Also, a good portion of your minimum payment is the interest you are being charged on your balance, so paying just your minimum payment each month does little to decrease your overall balance.
Credit cards allow you to keep a balance that you can pay off in time. Charge cards require you to pay off your entire balance every month or you will be charged a steep fee. Most banks no longer offer charge cards as an option.
A Cash Credit Limit tells you how much cash you have available to you through a cash advance. Most Cash Credit Limits are significantly lower than the actual Credit Limit.
Since credit card usage can get pretty complicated, we want to provide you with some tips and tricks to help keep you out of credit card debt and actually use your credit cards to make you money.
If you use your credit card properly, you won’t ever actually use your interest rate, no matter how high or low it is. Interest is charged off your overall balance. If you pay your credit card balance every month so you have a $0 balance, there is nothing to charge interest off of. Since interest is literally throwing away money, there is never a reason to carry a balance on your credit cards.
There are now hundreds of credit card options out there right now, so instead of just throwing a dart and seeing which card it hits, do some research on which credit card fits your life best. If you do a lot of grocery shopping, get a card that rewards you with higher rewards at grocery stores. If you use one specific airline all the time, get its credit card to rack up even more frequent flyer miles. If your purchases span a wide range of categories, get a credit card that offers a high rewards rate on all purchases.
Someone somewhere started a vicious rumor that it was good for your credit to carry a balance on your credit card. That is not true at all. A big part of your credit score is determined by how much credit card debt you carry. If you carry a lot, your score goes down. If you have a low balance, your score goes up. Plus, if you carry a balance, you will be throwing money away on interest you don’t need to be paying.
In general, credit card rewards don’t expire. In extreme cases, like leaving your rewards in your account for years or your credit card lender going out of business, you may end up losing your rewards, but it is not a very common practice, so don’t feel pressure to use your rewards before you are ready to.
Generally, no. If you use it as a credit to pay off items on your credit card, or use your rewards points to buy something via your credit card’s online store, the cash back is not taxable. If you, however, request a cash back check from the credit card lender and then deposit it into your bank account, it is then considered taxable income and you will be taxed on it.
Just because you have bad credit doesn’t mean you have to live without a credit card. It may actually help your credit score to get a credit card and use it correctly to show you are responsible with credit. If you are on the border of bad credit and average credit, you may be eligible for certain average credit credit cards. If your credit is pretty bad, you can always apply for a secured credit card. Secured credit cards require you to pay a down payment, usually in the $300 range, which then becomes your credit limit, so basically you are opening a line of credit that you have funded. Most secured credit cards report to the credit bureaus, so if you use your secured credit card responsibly and pay off the balance each month, you will see your credit score start to increase.
When credit cards first came out, having the credit card was a perk in itself. Now, there are so many credit card lenders that they compete to see who can offer the best rewards, which means great perks for the consumers.
The most common perk that credit cards offer is cash back rewards. Most offer between 1% and 2% in cash back rewards, which means you get 1 or 2 points per $1 you spend. Most reward points are 10% of the dollar amount, so if you have 10,000 points, that is $100. Certain cards will offer up to 6% cash back if you spend money in certain categories, like at grocery stores or the gas station.
Travel points work very similarly to cash back rewards, depending on what credit card you pick. General travel credit cards, which allow you to use your points on any travel purchase regardless of the airline, hotel, rental car company, etc., generally offer between 1% and 2% in travel points, which works the same as a cash back rewards card. If you get a branded credit card, which is usually affiliated with a certain airline or hotel chain, you can get up to 7% cash back when making purchases through that airline or hotel chain.
Think of an intro bonus as a signing bonus; in return for choosing a card, you get a little money bonus to say thank you. Of course, most come with strings attached, like spending between $500 and $5,000 in the first three to six months, depending on the bonus amount. These bonuses range from $10 up to $700, depending on the credit card.
This is a great perk for anyone who might want to use their credit card as a loan, which is usually not advised. A 0% intro APR means that you won’t pay any interest on your balance for a certain period of time, usually from 6 months up to 21 months from the time your card is activated. If you want to make a big purchase but need a year or more to pay if off, this is a good option since you won’t be charged interest. Just keep in mind that you still need to pay the minimum payment every month.
Some credit cards offer 0% intro APR on balance transfers, so if you have a balance on a credit card with high interest rates, you can transfer it to this new card and pay no interest, giving you up to 21 months to pay down the balance. Keep in mind that many balance transfer cards charge fees for doing a balance transfer, so make sure you will be saving money in the end.
Credit card lenders have become so creative when it comes to perks that it’s hard to keep track of them all. Here is a quick list of just a handful of other credit card perks available:
Many consumers search the web looking for credit card reviews to help them pick the best credit card, when in reality, most credit card reviews are based on generic criteria. Credit cards, by design, cater to a specific type of person and not the public in general.
For example, a credit card review might say a card that offers 2% cash back rewards is better than one than restricts you to just shopping at grocery stores. If you, however, do a lot of grocery shopping, and the credit card offers 5% at grocery stores, it is better for you than the 2% cash back credit card.
The same thing can be said for travel credit cards. A credit card review might advise you not to get locked in to a branded credit card for a specific airline, and that a general travel rewards credit card is better. If you, however, live in a city that is a hub for that airline and it is the only airline you fly, using the credit card for that airline can land you a lot of extra points.
There are no good or bad credit cards; only credit cards that are a better fit for certain people. You can comb through credit card reviews looking for one with the lowest interest rate, but if you have excellent credit, you are going to end up with a low interest rate anyway, and if you have average credit, you are going to end up with a higher interest rate.
So take credit card reviews with a grain of salt. Look for the specific perks and rates that you need to make the most of your credit card and make your decision based on your own research.