How do credit cards work?

Before applying for a credit card - especially if it’s your first one - you should know that credit cards are the best way to build credit and save money on everyday purchases. But it’s also good to know that credit cards can lead to bad outcomes, such as overspending and racking up expensive debt, if used irresponsibly.… read full answer

The potential for bad outcomes is why you should learn the basics of how to use a credit card responsibly before you apply for one. It’s also good to know what you’re going to use the card for and what your credit standing is before you apply. That will make it easier to get approved for the best deal.

We’ve outlined some tips below to help you maximize the pros of credit cards, while minimizing bad outcomes.

What to Know Before Applying for a Credit Card:

• Credit cards are the best way to build credit. For that reason, everyone should have at least one credit card for credit-building purposes. You don’t even need to make any purchases to benefit from a credit card, if you are concerned about overspending.
• Shop around before you decide on a credit card. There are more than 1,000 credit card offers available, from rewards cards to travel cards, store cards to charge cards. So it pays to comparison shop.
• Approval can take some time. It may take up to 10 business days to receive a decision after applying for a credit card. It depends on how well you qualify for a credit card, how you apply, and how fast the card issuer can verify your information. Some applicants may get instantly approved or rejected, though.
• Use credit cards responsibly. All major credit cards report account information to at least one of the three major credit bureaus each month. On-time payments and low credit utilization will help you build a good credit score.
• Once you turn 18 years old, you are eligible to apply for a credit card. But you can only use independent income as your annual income on the application. You’ll be able to use shared income, such as from a parent or spouse, when you turn 21.
• Be careful to avoid spending more than you can afford to repay. Overspending on a credit card is a recipe for debt. Credit cards have high interest rates, and we already owe more than $1 trillion in credit card debt overall in the U.S.
• If you’re a first-timer, you may have a harder time getting the credit card you want. If it’s your first time applying for a credit card, you may be starting out with limited credit history, so the best of the best credit card offers won’t be within reach yet. Students with no credit history will have easier approval odds with student credit cards, and many credit card companies offer them. Secured credit cards are also available to people with limited or damaged credit, and can help you build up your credit score.
• Know what you want to use the card for. This will tell you what type of credit card to look for. Cash back credit cards are good for everyday purchases, while travel rewards credit cards can pay off for people who travel. If you want to finance a big purchase, look for a 0% APR credit card.

The world of credit cards can be exciting and maybe a little overwhelming, especially if you’re just starting out as a credit card user. If you’re having trouble digesting all the options, WalletHub’s CardAdvisor can be a great tool to help you decide which credit card is right for you. Or, sign up for a free WalletHub account for more personalized credit card recommendations.

The short answer is that nothing is likely to happen if you don’t use your credit card for a few months. Not using your card could actually help your credit score if you have a $0 balance when you stop (contrary to some common myths about keeping a small credit card balance being beneficial).… read full answer

The longer answer is that exactly what happens if you don’t use your credit card depends on which card you have. Some rewards cards will revoke any unredeemed points, miles or cash back you have saved up if you don’t use your credit card at all for a certain period of time – usually around 12 months. And if you don’t use your credit card for 6 months or more, the issuer could close your account. But there’s no standard timeframe for when a credit card issuer will decide to close an account due to inactivity.

Having your account closed due to inactivity could hurt your credit standing and possibly make it seem like your credit history is shorter than it really is. However, you will not be charged any sort of inactivity fee by your credit card company if you don’t use your card to make purchases or other types of transactions for a prolonged period of time. Credit card inactivity fees are banned by law.

As a result, not using your credit card (at least not regularly) can be a great strategy if you want to build credit but are worried about overspending. You just have to make sure your balance is $0 when you stop using your card. A credit card with no balance will get reported to the credit bureaus as being in good standing each month, with an on-time payment and 0% credit utilization. That in turn will lead to credit score improvement if you manage the rest of your finances responsibly.

For your convenience, we’ll summarize the key points to remember below.

Here’s what happens if you don’t use your credit card:

• Nothing is likely to happen if you don’t use your credit card for a few months, as long as you make bill payments for any recurring monthly charges.
• The credit card’s issuer may decide to close your account after a long period of inactivity. There is no standard timeframe, but they will often send a notice in advance and give you a chance to use your card first.
• Some credit card rewards will expire after a certain period of account inactivity. You’ll also lose any rewards you’ve yet to redeem when your account is closed.
• If the credit card you’re not using has a $0 balance and is in good standing, positive information will be added to your credit reports each month the account stays open.
• Unpaid balances from before you stopped using the card will continue to accrue interest. If your balances have been paid in full, you won’t have to send in any new payments.
• If your credit card charges an annual fee, not using the card won’t get you out of having to pay. And if you’re not getting anything out of a card that you’re paying for, you might want to close it.

The bottom line is that not using your card can still be good for your credit. And it’s far better than using your card irresponsibly. So if you don’t trust yourself to limit your spending, it may be wise to set your card aside until you have a necessary expense.

Yes, you should get a credit card. You should get your own credit card account if you’re at least 18 years old, and you should get a parent to make you an authorized user on their credit card account when you are too young to get a credit card alone. There are many reasons to get a credit card, including convenience and earning rewards on purchases, but the best benefit is building the credit history needed to eventually land great interest rates when you need to borrow a lot of money, such as for a home or a vehicle.… read full answer

Why Should You Get a Credit Card

• Credit cards help build credit. Every month you pay your bill on time and keep your account in good standing, credit cards report good information about you to credit bureaus – even if you don’t use the card at all.
• Credit cards are convenient. Credit cards – especially Visa and Mastercard – are accepted nearly everywhere in the world, and it’s much easier to keep track of a credit card than a wad of paper currency.
• Credit cards are better to use abroad than cash or debit cards. As long as you don’t get a credit card with foreign transaction fees, credit cards are a huge asset when traveling outside the U.S. You won’t have to worry about changing money into local currency because it happens automatically at a low rate with a credit card.
• It’s easier to deal with credit card fraud than debit card fraud. All credit card networks have $0 liability guarantees for fraudulent transactions. When credit card fraud takes place, it’s usually a simple matter of calling the card issuer to get the charges taken off your account. Debit card fraud isn’t as easy to deal with, because it involves money that was taken from your bank account.
• Many credit cards offer rewards on purchases. Most people welcome free money, and that’s exactly what credit card rewards are. With the best rewards credit cards, you can get up to 6% back on some types of purchases, or up to 2% back on every purchase with a flat-rate cash back card.

When used responsibly, credit cards are a win-win situation. Plus, many credit cards give the opportunity to earn bonus rewards and enjoy perks such as free airport lounge access or 0% introductory APRs. There are even credit cards for people with bad credit - some of which can help rebuild damaged credit.

It’s reasonable to be worried about the downsides of credit cards – namely, overspending. But don’t give up on building credit as a result. Tools like secured credit cards and automatic payment features can help mitigate the risks for people who are new to credit cards, and you don’t have to even use a credit card to make purchases for it to build your credit history.

If you aren’t quite ready to take on the risk yourself, ask a parent or good friend if they can add you to their card as an authorized user. As long as the primary cardholder uses the card responsibly, authorized users get to build credit history without having to remember to pay the bill.

Ultimately, remembering these three critical rules of credit card use can go a long way toward ensuring credit is a positive in your life: 1) Always pay your bill in full and on-time; 2) Don’t spend more than you can afford to pay every month; and 3) Always read the fine print before you apply. Do those things and your wallet will thank you.