Credit Cards

A credit card is a payment method that lets the user borrow money as needed to purchase goods and services. Using a credit card responsibly also is the easiest way to build a good credit score. Other benefits for credit card users include the opportunity to earn rewards on purchases, the flexibility to pay off large purchases over time, or the chance to reduce the cost of existing debt through a balance transfer. On the other hand, banks and credit unions offer credit cards because they are a good source of income from fees and interest charges.

To qualify for a credit card account, an applicant must be at least 18 years old with enough income to afford monthly bill payments, in light of the individual’s existing financial obligations. There is no minimum age to get a credit card as an authorized user, however.

Physically, a credit card is about the size of a driver’s license. Most new credit cards are now equipped with a magnetic stripe and a metal chip, allowing cardholders to swipe, dip or tap their card in or against a payment terminal to complete a purchase. The stripe, the chip, or the credit card number can be used to make purchases, which will deduct from the card’s credit line. The amount of a credit line – called a credit limit – depends on the cardholder’s income and overall creditworthiness. Once a month, the cardholder receives a credit card statement detailing purchases and payments made during that billing cycle, and noting when the cardholder must make a payment on the account.

Credit Card Features & Fees

Credit cards require regular payments to keep the account open and in good standing. If you pay for your purchases within the window of the grace period on the account (typically between 21 and 25 days after the monthly statement is issued), you won’t have to pay more than you borrowed. If you carry your balance past that, however, you’ll generally have to pay the regular interest rate - or regular APR - on the amount you owe. Credit cards have higher regular APRs than most consumer loans, so it’s best to avoid carrying a balance.

Outside of interest charges, credit cards may come with fees. Late fees apply to nearly all credit cards when you don’t pay at least the minimum payment by the due date. Annual, monthly, and one-time fees may be charged just to have certain credit cards. The credit cards with the biggest benefits and perks - travel credits, free airport lounge memberships, and the highest rewards rates, to name a few - are usually the ones with annual fees.

Credit cards may give access to a certain amount of cash in the form of a cash advance. When you take out a cash advance, the grace period does not apply. You will start accruing interest the day you get the cash, and the cash advance fee will be added to your credit card balance.

A balance transfer is another credit card function that usually comes with a fee. Balance transfers essentially pay one credit card balance with another credit card for the purpose of saving money in interest charges. In addition to the average balance transfer fee of 3%-5%, there’s an interest rate for the amount you transfer.

How many different types of credit cards there are depends on how you look at it. There’s a strong case to be made that there are two types of credit cards, but there are actually three different arguments for that. On the one hand, you could group cards based on whether they require you to place a refundable security deposit. Secured credit cards do; unsecured credit cards don’t. You could also segment things based on where a card can be used. Credit cards with the Visa, Mastercard, American Express or Discover logo can be used anywhere. Store credit cards can only be used at the retailers they’re affiliated with. Or you could split up the offers based on whether they require you to pay your bill in full every month. Charge cards; other credit cards don’t.

That being said, you could also argue there are three types of credit cards, to match the three major groups of credit card users: students, small business owners and the rest of us. Some might say there are five types, for people with bad, limited, fair, good and excellent credit, respectively. And there are even more credit card categories if you break things down by feature. For example, the best 0% credit cards are different than the best cash back credit cards, which are different than the best travel credit cards, and so on.

See 2020's Best Credit Cards

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On the surface, the credit card transaction process seems simple: Customers swipe their cards, and before they know it, the transaction is complete. Behind every swipe, however, is a profoundly more complex procedure than what meets the eye. In fact, sliding the card and signing the receipt are only the first and final steps of a complicated procedure. And the whole process — though it happens in merely a few seconds — involves multiple stages and several actors working behind the scenes.

Although being familiar with the credit card transaction process may not seem useful to the average consumer, it provides valuable insight into the inner-workings of modern commerce as well as the prices we ultimately pay at the register. What’s more, knowledge of the credit card transaction process is extremely important for small business owners since payment processing represents one of the biggest costs that merchants must confront. Below, we provide a cross-sectional perspective of the process that takes place with every swipe — from the participants to getting approved or declined.

1. Credit Card Transaction Participants
2. Credit Card Transaction Process
3. Credit Card Processing Fees & Costs
4. When a Credit Card Gets Declined

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When you choose a credit card for the first time, you should weigh several factors. Ask yourself if you really need a credit card. If so, decide what will you use the credit card for. You should also weigh your current financial situation, and assess whether you can make monthly payments on time, and for the full amount. If you’re planning on carrying a balance, make sure you understand things such as minimum payments and interest.

Above all, be realistic in your expectations. Your first credit card will likely have a low credit limit, a high interest rates, and an annual fee. If your most viable option is a secured card, make sure you know the difference between secured and unsecured credit cards.

Here is how you choose a credit card for the first time:

• Decide if you need a credit card. If you’re starting out in the “real world,” you will need to establish credit. If used responsibly, a credit card is a valuable asset in starting the process. Good credit can set you up for future car loans or mortgages, and land you favorable interest rates. Nearly every other start-up expense such as apartment rentals, cell phones, and insurance premiums also require to have an established, and good credit profile.
• Determine how the card will be used. Whether it’s for everyday expenses such as gas and groceries, or furnishing your first apartment, understand that whatever you purchase on the card, you will have to pay back. Make sure you’re aware of your card’s credit limit, and what happens if you use up a large chunk of that credit limit.
• Take a look at your finances. Is your current salary enough to handle a credit card payment and any student loans debt on top of all the everyday expenses? Make sure you have enough funds at the end of the month to pay the credit card bill, preferably for the full amount. It’s easy to fall into the trap of setting aside just enough to cover the minimum payment, but that will end up cost you more in the long run.
• Review Terms and Conditions carefully. Compare against several cards. Research a card’s interest rate, or Annual Percentage Rate, and how that rate is calculated. Familiarize yourself with the card’s grace period, and how can avoid all those interest charges. Know your minimum payment and when it’s due. If a card has any fees such as annual fees, know that those charges will impact your credit limit.
• Consider a secured credit card. A secured card may be the better option for establishing credit. You’ll have to put up a security deposit, which will also be your credit limit. How much spending power you have depends on the size of your deposit. You’ll get a better rate, and fewer fees than with an unsecured card. Plus, if you’re responsible with a secured card for several months, you’ll be eligible for a credit limit increase, or you’ll be able to transition to an unsecured card with much better terms.

Don’t feel like you have to accept the first credit card that’s offered to you. Or every offer. A credit card can be a valuable financial tool to help build your credit. Too many credit cards too soon may be an invitation to overspend and overextend all of your available credit. That will quickly damage the very credit history you’re trying to establish.

The average adult has 5.6 credit cards: 3.1 cards that can be used anywhere and 2.5 store cards, according to 2017 data from Experian. But there’s no golden rule for how many credit cards you should have, or how many credit cards is too many. It depends on personal preference as well as your credit standing and organizational skills.

Using more than one credit card can help you save by allowing you to get the best terms for every transaction that you make. No single credit card offers the best rewards in every purchase category, plus the lowest rates and fees. But you can achieve that effect with a collection of cards that each excel in a particular area. For example, you could get the best cash back credit card for everyday spending, the best travel rewards card to earn extra on airfare and hotel reservations, and a 0% credit card before making a big-ticket purchase.

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Visa and Mastercard are the two largest card networks in the world, accepted in more than 200 countries and territories worldwide. As card networks, Visa and Mastercard control where credit cards and debit cards can be used, as well as what secondary perks they offer – from $0 fraud liability guarantees to rental car insurance. Neither Visa nor Mastercard actually issues credit cards, unlike the two other leading card networks: American Express and Discover.

That’s why you should only worry about whether to get a Visa or Mastercard credit card if you’re torn between two offers. In other words, if two cards are identical in terms of rewards, rates and fees, then it’s appropriate to weigh the small differences that do exist between Mastercard and Visa.

For more information about how Visa and Mastercard stack up against one another, consult the table below. Make sure to also check out our editor’s picks for the best Visa and Mastercard credit cards. Some of the cards listed on this page originate from WalletHub’s partners, but that did not impact our conclusions. Offers are accurate as of June 11, 2018 and many are likely to have changed since.

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A free credit card is an offer with no annual, monthly or one-time membership fees. Some free credit cards also have 0% intro APRs, no balance-transfer fee and/or no foreign-transaction fee. However, none of the cards listed below (some of which are from WalletHub partners) will be completely free if used irresponsibly. For example, if you carry a balance from month to month, you’ll still have to pay interest (unless there’s a 0% intro APR).
 

Best Free Credit Cards:

• Discover it® Secured - Fixing Credit
• Journey® Student Rewards from Capital One® - Students
• Wells Fargo Platinum card - 0% Intro APR on Purchases
• Citi® Double Cash Card – 18 month BT offer - Rewards
• Capital One® Platinum Credit Card - Building Credit
• PenFed Power Cash Rewards Visa Signature® Card - Cash Back
• SunTrust Prime Rewards Credit Card - Balance Transfers

The best cards tend to be reserved for people with good or excellent credit. But no-fee options are available to people of all credit levels. Even folks with bad credit can usually find a free credit card, as long as they’re willing to place a refundable deposit.

If you don’t know where your credit stands, you can check your latest credit score for free on WalletHub.

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WalletHub’s top three first credit card tips are: 1) Get a credit card because it’s the easiest way to build credit; 2) set up automatic monthly payments from a bank account because on-time payments fuel credit score improvement; and 3) Try to pay your bill in full every month because it will save you money and keep your spending under control.

In other words, it is important to get your first credit card as early as possible and then use it responsibly, by spending within your means and not missing due dates. If you do that, you’ll be able to graduate to a great second credit card sooner.

It all starts with picking the right first credit card, though. Most people looking for their first card have limited or no credit history, unless they’ve been an authorized user on a credit card or have a loan. As a result, cards that accept applicants with “limited credit” or “bad credit” are the most popular starter credit cards.

Below, you can find advice on which card to make your first as well as the steps to take for success with everything after that.

Helpful First Credit Card Tips:

1. Compare credit card offers thoroughly: Your main options include secured cards, which are the easiest to get and require a security deposit, and cards for limited credit, which tend to give slightly better terms and cater to people who have little/no credit experience. It’s important to find the right card right away so you only have to apply once.
2. Put your needs first: Start with a no annual fee credit card, if you can, and use other terms as a tiebreaker. Rewards are best if you plan to pay your bill in full every month. First credit cards usually have high interest rates, so it’s best to pay in full.
3. Never max out your spending limit: You don’t have to use your card to build credit. But if you do, it’s important to not overspend. Try to use less than 30% of your available credit. If you’re tempted to overspend, keep the account open but lock the card away.
4. Never miss a due date: Payment history is one of the most important portions of your credit score. Late payments will cause a lot of damage. But you can avoid ever paying late by setting up automatic monthly payments with your issuer.
5. Pay in full to avoid interest. Most first credit cards have very high interest rates. But you will only owe interest if you carry a balance from month to month. So paying your first card’s bill in full each month is not only great for your credit, but it will also save you money.
6. Watch your utilization: While it is best to use 30% or less of your credit limit, the reality is that a lot of first credit cards have very low limits. Paying your bill multiple times per month can help keep your end-of-month utilization figure low.
7. Review your monthly statements: Getting into this routine will help you better understand your spending habits. And it will help you avoid getting overcharged if any of the merchants you bought from made a mistake (or if someone used your card fraudulently).
8. Stick to a budget: Figure out how much you can afford to spend each month and try keep your charges from exceeding that amount. If you do have to carry a balance between months at some point, make a plan for paying off what you owe as quickly as possible.

When you’re in the market for your first credit card, you probably don’t have a credit score yet. But it’s possible you’ve built a bit of credit history through other means. If that’s the case, you could have far more credit card options available to you. You can check your latest credit score for free on WalletHub. It’s also good to check your credit reports, just to make sure there’s nothing inaccurate or suspicious on them.

Once you get a card and begin using it on a regular basis, it’s even more important to monitor your credit to make sure everything is correct. Knowing your credit score will also help you decide when the time is right to graduate to your second credit card.

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).

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.

Credit cards work based on a buy-now-pay-later arrangement with the cardholder, with fees and interest supporting the cost of lending. When you use a credit card to make a purchase, you’re borrowing money from the credit card’s issuer to complete the transaction, and then repaying the amount at the end of the billing cycle, either in part or in full. By paying the bill in full each month, you’re essentially borrowing money for free, because you will be avoiding interest charges. If you can’t pay your balance in full, at least make the minimum payment required by the due date. Interest will be applied to the remaining balance, but you won’t damage your credit score.

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.
• Credit cards enable cardholders to build credit, unlike debit cards.
• Some credit cards reward cardholders for making purchases. Some cards charge annual membership fees.
• If cardholders don’t pay their full balance by the due date each month, interest charges are added to the balance each day.
• Credit card approval depends on an applicant’s overall creditworthiness. Credit history, income and debt obligations are important factors.

How Credit Card Rewards Work

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.

This isn’t charity, though. Credit cards offer short-term borrowing 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.

Building Credit with Credit Cards

Generally, the 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. But if you’re new to credit, credit cards are the best credit-building tools around. As long as you use the card responsibly and pay the bill on time every month, or never make purchases with the card at all, the issuer will report positive information to the credit bureaus each month. Plus, 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.

Learn More About How Credit Cards Work

Now you know how credit cards work, in a nutshell. That said, many of the finer details of credit cards – including all the types of credit cards available and how credit card interest works – don’t exactly fit in a nutshell. That doesn’t make them any less important to learn about, however, especially if you’re considering getting a credit card for the first time.