Whether you’re considering getting your first credit card or you have a dozen different cards in your wallet, there’s a good chance you have some unanswered questions about how your credit cards work.
To help you understand your credit cards, we’ll start out by defining some common terms:
- Credit limit: The amount you can charge on your card. Some cards will let you go over your credit limit, but charge you an additional fee for the privilege.
- Minimum monthly payment: The minimum amount you have to pay towards your balance every month. This is usually a low amount even on a high balance, and if you make only minimum payments on credit card debt you’ll never get out of it.
- Due date: Like any bill, your credit card bill has a due date. Though many cards offer a short grace period after the due date during which you can pay without penalty, you can expect late fees if you go too late.
- Interest rate: All credit cards have an interest rate that is charged on balances you carry. Different types of balances are likely to incur different rates — for example, cash advances and balance transfers will often be at a higher interest rate than ordinary purchases.
- Introductory rate: Many lenders will offer a special lower introductory rate to tempt you into getting their card instead of accepting the other offers that clutter your mailbox.
- Penalty rate: If you pay your bill well after the due date (or break other terms of your agreement with your credit card company), you can trigger a penalty interest rate. This is always higher than your regular interest rate. You can usually fix this by paying on time for six months — but the easiest way is not to trigger it in the first place!
- Annual fee: Some cards will have a fee you pay yearly for the privilege of having the card. Cards that offer you more benefits and perks are more likely to carry a fee.
Why do I need a credit card?
You’ve probably heard horror stories about the dangers of getting into credit card debt — where you could make the minimum payment for the rest of your life and never get out of it. However, a credit card can be a helpful addition to your financial toolbox if you use it smartly.
A credit card can help you establish your credit and build your credit history — both of which will improve your credit rating — if you make regular purchases and be sure to pay on time. Credit cards can also be a useful way to manage spending by delaying payments until the bill is due (and maybe after your paycheck). It’s good to have a credit card for purchases in case of emergencies, too — though with interest rates, you don’t want to rely on them for big spending on a regular basis. You can also earn rewards if you have a card that offers reward points.
What’s the difference between a credit card and a debit card?
Though they work the same way when you use them to shop, the difference lies in where the money comes from. A debit card takes cash directly from your bank account (when you use your card, the money is immediately gone from your account) while a credit card is essentially a short-term loan from your credit card company, which you need to pay (or at least make a minimum payment on) monthly.
Debit cards are great because they won’t let you overspend and dig yourself into debt — plus there are no bills to remember to pay every month. However, credit cards have a big advantage in terms of fraud: while both typically have limited liability for fraud, if your debit card is stolen the money is gone and has to be returned to you — while with a credit card you simply contact your card provider and don’t pay the bill for fraudulent transactions.
What should I do if my credit card is lost or stolen?
Contact your card provider immediately so you can be issued a new card and aren’t liable for fraudulent charges.
What do credit cards have to do with my credit score?
Your credit score is a compilation of information about your financial history and includes some information about how you use credit cards. Particularly relevant to credit cards, your credit score considers:
- How much credit you have available compared to how much credit you’re using. If you have $1000 in credit and you’re using $500 (50%), that will look worse than if you have $5000 in credit and you’re using $500 (10%). This is precisely why you see some credit score advice that tells you not to close cards — but you aren’t likely to run into a problem unless it dramatically changes the ratio of credit to debt.
- The length of your credit history, which includes how long you’ve had any credit card (even cards you’ve closed accounts on).
- Whether you pay your bills on time. Late payments and delinquent accounts won’t look good for your credit score.
Why has my interest rate gone up?
Your credit card company can’t just change the rate on your card whenever they want — but there are a number of circumstances in which your rate can change. Your lower introductory rate may have expired, you may have triggered a penalty rate with a late payment, or your credit card company may have sent you a notification of a change in terms — which could include a change in your interest rate. Be sure to pay attention to mail from your credit card company and if your rate goes up unexpectedly, be sure to call and ask about it.
How can I get a better interest rate?
When you’re looking for a credit card, it pays to shop around since some cards will offer you better rates than others. If you have a card with a high interest rate and want to lower it, though, the best bet is to contact your credit card company and ask about it — sometimes they’ll be willing to work with you, especially if you tell them you have offers from other credit card companies you’re considering.
Whether you’re using a credit card or not, always remember to shop smart and don’t get in over your head with purchases. If you’re already in over your head, it may be time to stop living paycheck to paycheck and to look into debt management options.