Welcome to the world of credit. There’s a lot to learn, but most of the credit card basics are pretty simple. A credit card is a tool that allows you to make purchases using a lender’s funds, with the promise that you will repay that lender. At the end of every billing period, you get a statement that lists those purchases, the sum of which is known as your balance. If you pay off those purchases before the due date, that’s all you’ll owe. If you don’t repay the full amount, the lender will charge you interest on the remaining balance.
That’s the process at its simplest, but let’s define some of the major terms you’ll see when using a credit card. Then, check out some of the resources below to continue learning about credit and apply for a credit card of your own.
Credit Card Basics – Key Terms:
Credit bureau. These agencies get information about your use of credit from lenders and compile “credit reports.” Your credit reports are used to calculate your “credit score.” The higher your credit score, the more likely you are to be approved for a credit card.
Secured vs. unsecured. Secured credit cards require you to put up a security deposit, usually $200+, which serves as your credit limit. They have the best approval odds of all credit cards. Unsecured credit cards don’t require such collateral, so they’re harder to get when you have damaged credit or are just starting out.
Approval. You have to apply for credit cards, and won’t always be accepted. Approval depends on your credit history, income and assets, debts and several other factors.
Credit limit. The amount of money you’re allowed to spend with your card. But you should only aim to use 30% or less of it to avoid hurting your credit score.
APR. Annual percentage rate. This essentially describes how much interest you would pay in a year’s time on any balance. The current average amongst all credit cards is 17.98%. But keep in mind that you don’t have to pay any interest if you always pay off your balance in full. Some cards may have a special intro APR on purchases, often 0% for a certain number of months. There can also be intro rates when you transfer a balance from another debt to a card.
Annual fee. Some credit cards will make you pay a certain amount per year to keep the card. Others won’t. Cards with higher fees tend to have better rates and rewards.
The most important. As long as you pay back that money within the “grace period” of 25-30 days, you don't have to pay extra. If you go longer, though, you'll have to pay interest. Make sure you understand budgeting, saving and avoiding unnecessary debt – and your finances will be healthy.
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