Credit cards are financial products that provide a line of credit to use for making purchases. When you use a credit card, you’re borrowing money from the credit card’s issuer to make the transaction, and then repaying that loan at the end of each billing cycle, either in part or in full. By paying the bill in full each month, you can avoid being charged interest. If you can’t pay your balance in full, at least make the minimum payment required by the due date. Interest will still be applied to the remaining balance, but you won’t damage your credit score.
Many credit cards reward cardholders with cash back, points or miles for every purchase made. Plus, the best credit cards often come with signup bonuses that cardholders can earn after meeting a minimum spending requirement in the first few months. Some credit cards offer low introductory interest rates, too.
Generally, credit cards with the best rewards, rates, and benefits go to people with high credit scores, a lot of income, and little-to-no debt. Essentially, the most proven and creditworthy individuals get the best credit cards. But if you’re new to credit, credit cards are the best credit-building tools around. Even if you never use the card to make purchases, the issuer will report positive information to the credit bureaus every month. And it’s very easy for someone with no credit to get a credit card, especially a secured card where your credit limit is based on how much you put down as a security deposit.
This isn’t charity, though. Credit cards offer short-term loans and give rewards because it’s profitable for credit card issuers. If a cardholder decides to pay off a credit card balance over time, they’ll have to pay interest. And if they have the chance to earn rewards, they’re likely to spend more than they would otherwise.
Credit cards also work for transactions other than purchases, including balance transfers and cash advances, which have the potential to be even more profitable for issuers. Balance transfers give people the chance to repay existing debt with a lower interest rate, for a fee – usually 3% to 5% of the transferred amount. Cash advances let you withdraw cash from your credit line, but a high fee and interest rate apply right away.
How Credit Cards Work:
Credit cards allow users to buy now and pay later, even over the course of months.
If cardholders don’t pay their full balance by the due date each month, interest charges are added to the balance each day.
Credit cards allow cardholders to build credit, unlike debit cards. Having good credit is extremely important when it comes to renting an apartment or buying a home, and can get cardholders better rates on things like insurance and mortgages.
Some credit cards reward cardholders for making purchases. Some cards charge annual membership fees.
Credit card approval depends on an applicant’s overall creditworthiness. Credit history, income and debt obligations are important factors.
Now that you’ve been introduced to credit cards in general, it’s time to get better acquainted with the various types of credit cards that exist, the ways in which they could cost you if you’re not careful, and why you really should get one at the end of the day. You can find all of that and more below.
Types of Credit Cards
There are well over 1,000 credit card offers on the market right now. That might seem overwhelming, but credit cards can be grouped into several categories that make them more digestible.
Cash back credit cards reward users by returning a certain percentage of each purchase made. You can then redeem the cash back that you earn for credits toward your card’s bill, paper checks, bank account deposits, or gift cards for your favorite stores. The options vary by card.
Travel rewards credit cards offer points or miles on purchases that you can then redeem to pay for recent travel expenses and/or future trips. Some travel credit cards are affiliated with specific airlines, hotels or other travel companies. Others give rewards that work equally well for all travel.
Business credit cards can only be used for business purchases and are only available to business owners or other company representatives. They usually reward users with cash back or travel miles, often providing bonus rewards in purchase categories popular with the business community. Business credit cards also come with benefits particularly useful to business people, like airport lounge access and helpful expense tracking tools.
Students with limited or no credit history can get better credit cards than their lack of experience would otherwise merit. Credit card issuers recognize that college graduates are likely to earn more in their lifetime than non-graduates. Students also tend to be relatively young. That is a combination that could lead to years and years of highly profitable banking needs for a financial institution that gets in early to fulfill.
Secured cards require a security deposit, which then acts as your credit limit (the amount you can spend on your card). Since you can only spend as much as you’ve deposited, the risk is much less for issuers, and they’ll approve less creditworthy individuals who may not be able to get other cards. Secured credit cards can help you build credit just like any other credit card, however.
There are plenty of other ways to segment the credit card market, too, including by the credit rating required for approval. To learn more, check out WalletHub’s breakdown of all the different types of credit cards available right now.
How Does Credit Card Interest Work?
Credit card interest is charged on whatever balance you carry from billing period to billing period. Credit card interest rates are some of the most expensive interest rates you’ll come across, so it’s best to pay your bill in full each month. If you have a balance remaining after the due date, interest charges are applied immediately. Even worse, interest continues to be added on each day, and the previous day’s interest becomes part of the balance you owe interest on the next. You have to pay two consecutive bills in full to break this cycle.
If you can’t pay your full credit card bill by the due date, be sure to make at least the minimum payment. Minimum payments differ card-to-card but are usually a flat fee, like $25, or a small percentage of your balance, like 2%-3%. Making the minimum payment does not prevent interest from being charged on the remaining balance, but it does prevent you from being charged late fees and your credit score from being damaged.
For a more in-depth look at credit card interest, how it works, and mistakes to avoid, check out WalletHub’s credit card interest guide.
Credit Card Fees
An annual fee is the yearly cost of simply owning whatever credit card you have. There are plenty of credit cards with no annual fees, so it’s easy to avoid paying if that’s your priority.
There are other fees that could come into play, too. For example, late fees are assessed when you don’t pay your credit card bill on time, and are usually around $35-$38. Balance transfer fees apply when you move a debt from a credit card or loan to a new credit card account. And cash advance fees apply when you use your credit card to get cash from an ATM or bank teller. Balance transfer and cash advance fees are usually either a percentage (like 3%-5%) or a flat fee (typically around $10), whichever of those is more.
Yes, you should get a credit card. If you’re able to get a credit card and use it responsibly, the benefits far outweigh any potential negatives. For instance, using a credit card is the easiest way to build your credit, which is important for many things you’ll do in life. Even just having open credit cards, regardless of how often you use them, helps build credit.
For personalized credit card recommendations, you can also sign up for a free WalletHub account. It’s easier than ever now to get a credit card, and with all of the great rewards and other perks to choose from, there’s little reason to wait.
Hi! Thanks for writing! A credit card (as opposed to a "debit card" which is a card that lets you pull money right out of your account without the hassle of having to write a check) lets you buy things and pay for them later. It is a type of loan or debt called "unsecured debt." "Secured debt" means that there is a tangible asset such as your car or house as collateral for the loan. Rates tend to be lower for secured loans because lenders figure they can sell the house or boat to get back their money if you don’t pay the loan back. "Unsecured debt" is guaranteed only by your promise to pay it back. If you don’t pay, lenders will work to get their money back, but, as the saying goes “you can’t get blood out of a turnip.” So lenders run risk never getting the money they lent to you back. That’s why they charge a higher interest rate on unsecured debt.
A credit card lets you borrow conveniently, have money ready when you need it, especially in emergencies, and access a revolving line of credit. Credit cards require a minimum payment each month, but if you only make the minimum payment you incur a high rate of interest (between 13% and 25% or even more). Credit cards are useful because they help during emergencies; are safer and more convenient than carrying cash; allow you to easily make large purchases; help you build a financial credit history that in turn helps you get mortgages, home rentals, insurance and even job more easily and at lower rates; yield travel and other rewards; and let you spend money you don’t have. The primary disadvantage of a credit card is the same as its main advantage: it lets you spend money you don’t have, so you can get into financial difficulties if you spend more with your credit card than you can pay back.
To get a credit card, you apply for one at one of the credit card companies - Wallet Hub has great comparison sites to check, compare, and apply. Thank you so much for writing and best wishes to you!
“Too many” credit cards could be anywhere from 2 to 5 or more, depending on the individual. Everyone should have at least 1 credit card for credit-building purposes, even if they don’t use it to make purchases. But it’s hard to say exactly how many credit cards is too many because the … read full answernumber of cards you should have differs from person to person. It depends on how well you can manage 1 credit card, then 2, and so on.
So while 3 credit cards could be too many for one person, someone else might be able to comfortably manage 6. The average adult has 4 credit cards, according to a 2019 Experian report.
If you’re not sure how many credit cards is too many for you, there are a number of factors you can think about when making your decision. In particular, consider your recent spending and payment history. If you’re having trouble paying the full statement balance by the due date on each account you already have open, think twice about applying for another credit card account.
How to determine how many credit cards is too many for you:
Look at your credit report and score. If you have a history of financial mistakes, such as missed payments, you probably don’t want to get more than one card until you prove yourself to be a responsible borrower. Besides, it may be hard to get more than one worthwhile cards with damaged credit, anyway.
Review your utilization and payment history. If you’re maxing out all the cards you have, credit card companies probably won’t want to give you more spending power. Plus, credit card debt can be very expensive, and you don’t want to rack up balances that exceed what you can repay comfortably.
What does the credit card company think? Some issuers have unofficial rules regarding how many credit cards is too many for an applicant to have. If you have too many cards – either overall, or with that specific card issuer – they may deny your application. There are lots of rumors floating around that Chase will deny a credit card application if you have too many credit cards, for example.
Determine how well you’re keeping track of your credit cards. Even if your credit is good and you’ve never forgotten to pay a bill, that doesn’t mean you never will. Having too many open accounts to keep track of can lead to forgotten due dates, interest charges from simply forgetting to pay a credit card in full, and other issues. If you have trouble listing your credit cards from memory, you’re likely to forget to pay one at some point.
There are benefits to having more than one credit card account. Having several credit cards can help you save money by allowing you to get the best collection of rates and rewards for your biggest transactions. For example, you could get a flat-rate cash back credit card for everyday expenses, a bonus rewards card for travel, and a balance transfer card to reduce the cost of existing debt. Having multiple cards can also help your credit score if you keep your utilization low and your payments on time.
What you should watch out for is applying for too many credit cards too quickly. It’s best to not apply for more than one or two per year, as each application puts a hard inquiry on your credit report and temporarily hurts your credit score.
The more data that’s at your disposal, the easier it will be to decide how many credit cards you should have. WalletHub can help with free daily credit score updates and personalized credit-improvement advice.
Closing a credit card with zero balance is not a good idea if that card has no annual fee. Any credit card you manage responsibly, even an unused one, reflects positively on your credit history. So closing such a card will have a negative impact on your credit standing. But it can be worth it if your card is costly or if you’re worried about falling victim to fraud while you’re not keeping a close eye on it.… read full answer
Here are the arguments against closing a credit card with zero balance:
Average account age suffers. This makes up at least 15% of your overall credit rating, so shortening it can hurt. Here’s a quick example: Imagine you have three credit card accounts, which have been open for 3 years, 5 years and 10 years, respectively. The average account age is 6 years. If you close the 10-year-old account, the age of your average account falls to 4 years. Older accounts are better for your score because a long track record of responsibility tells issuers you’re likely to behave the same way in the future.
Utilization increases. “Utilization,” or how much of your credit line you use, is important to your score. Creditors care about both your utilization on individual cards and your total utilization. Generally, the lower each is, the better. And closing an account with zero balance will increase your total utilization. Let’s say you have three credit cards, each with a $1,000 credit line. You use 0% of one and 25% of the other two. Overall, that’s 16.7% utilization. But if you cancel the unused card, it jumps to 25%. That’s troublesome because credit score damage typically worsens if your utilization rises above 30%, and you’d be close to that milestone.
So closing an account will be a blow to your credit. You can improve your score afterward by paying on time with your remaining account(s). But it’s usually best to just keep accounts open and avoid the damage entirely. There are a few exceptions, though.
Here’s when to close a credit card with zero balance:
It has an expensive annual fee.
You’re worried about fraud and won’t be monitoring the card as closely. All credit cards give you a $0 fraud liability guarantee, but you might not want to count on the issuer to flag every fraudulent charge on its own.
Keeping it open becomes a hassle, for one reason or another.
By the way, in case you’re wondering, it is possible to close a credit card that has a balance. But you’ll still be responsible for paying and will continue to accrue interest until the balance is fully paid off, even after the account is closed. You just won’t be able to make any new purchases.
Credit cards offer you a line of credit that can be used to make purchases, balance transfers and/or cash advances and requiring that you pay back the loan amount in the future.
A credit card is pretty much a key to a loan.
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