Whenever you hear the words Credit Card, you’re probably only thinking about purchasing items with it and paying the bill back later. However, there are many more uses for a credit card than you probably know.
That’s where we come in. We’re going to teach you all of the basics regarding credit cards, all of the physical features of the card and how they work. Check out our Bank Bonuses, Saving Rates and Credit Card Bonuses!
History of Credit Cards
Unknown to most, credit cards have actually been around the U.S. for almost 100 years now. Initially, credit cards started off as a marketing tool for gas stations, hotels and department stores to create loyal customers.
Nowadays, they are just viewed as ways of making payments in a convenient manner. As these tools continue to evolve, so has their term, and if used incorrectly, can cost you.
Uncovering The Mystery
- Credit Card Numbers: You might wonder to yourself: why are there so many numbers on the front of my card? Well the simple answer to that is that they represent which industry the card is from (gas, bank, clothing store, etc.) and which user owns the card.
- Magstripes: Onto the back of the card. The thick black or grey line that you swipe whenever you make a purchase actually tells the store where and to whom to charge the purchase. It isn’t called magstripe for nothing, so if you’re near any other magnetic object, it might cause your credit card to stop working!
- Purchases: Credit card owners can now make purchases in person, online, or over the phone. Normally, the cost of the purchase will be covered by the card until you must pay your credit card bill. Typically, the bill is due in 21 days and companies will either send you a letter or give you a notice online in your account.
- Payment: Paying your credit card bill can be done in a couple of ways. Generally, you will pay by check or online. Also, you can choose to pay the minimum, in-between, or in full! This allows for flexibility when making payments, but you will be charged interest if you don’t pay in full.
- Interest Rates: Interest is the amount you have to pay when you’re borrowing money. This is represented as APR (annual percentage rate). However, you can actually avoid paying interest if you pay your monthly credit card bill in full.
How Do Credit Cards Work?
Essentially, credit cards are just plastic cards that allow banks and financial institutions to grant their cardholders to access their credit card account. Also, it is a way for merchants to use the cardholders’ information to process purchases and charge their credit card account.
What is a credit card account? Similar to how a debit card is linked to your checking account, credit cards are linked to a credit account. Credit accounts are just borrowing tools and a form of debt.
The type of borrowing associated with credit cards is called revolving credit, which means you borrow the money as you spend. Generally, there is a limit on how much your credit card company will let you borrow on the account.
What is a credit card balance? Any transaction charged to your card will be added to your credit card balance. This is the amount of money you owe back to the financial institution.
A good rule to follow with your credit card is try to limit your credit card balance to what you can repay each month in full.
What is a minimum payment? A minimum payment is simply the amount you must pay each month to keep all of your credit card accounts in “good standing”.
The amount is determined based on your credit card balance. The amount you owe can vary but can also be calculated as the outstanding interest you owe plus one percent of the balance.
What is credit card interest? Another name for credit card interest is the credit card finance charge and it is the cost you pay to have a balance. The amount you must pay is set by your card’s annual percentage rate (APR). Your APR is the rate at which your balance accrues interest.
Although there are a few terms you’ll need to know, it’s quite simple overall. Your interest is what you have to pay on your average daily balance for the month.
However, there is some good news. Financial institutions and banks will normally give their customers a 25-day grace period where you can repay your balance before any interest is charged. So, if you pay your balance in full each month, you won’t get charged any credit card interest.
What are credit card fees? The biggest fees you should worry about are your credit card’s annual fees. In short, they are the fees charged for the privilege of having the card. Depending on the credit card you have, you might see fees ranging from $0 to $500.
Credit card companies will also charge other fees on certain transactions including:
- Balance transfer fees: This charge comes when you try to use one credit card to pay off the balance on another credit card.
- Cash advance fees: This fee occurs when you borrow cash from your line of credit rather than making a purchase.
- Foreign transaction fees: Fees that occur when you make purchases made out side of your domestic country.
- Late payment fees: Fees that occur when you make a credit card payment after your monthly due date.
What are the different types of credit cards? There are a variety of credit cards to choose from and they all work differently from one another. Here are the most common types and their highlights:
- Rewards credit cards. These cards give cardholders rewards for making purchases using their credit cards. Rewards can come in the form of cash back, or points that can be redeemed for travel purchases or other goods.
- Secured credit cards. Requires a deposit of cash as a form of insurance against the credit card balance. Because the card is secured by the deposit, it is also easier to qualify for. A great option for those who want to rebuild their credit.
- Charge cards. These cards require cardholders to repay their balance in full every month. The minimum payment is always equal to the monthly charges on the card.
- Retail cards. A card that issued by a retailer or store, these cards have accounts with the store itself.
Making the Right Pick
Now that we have the basics out of the way, it’s time to choose the right credit card to start building your credit and get you some experience.
Although there are a lot of options with a lot of rewards, you have to focus on the fees and costs of each credit card. Here are some tips to help you pick the best card for you:
- Credit Score: If you have an excellent credit score, get a card with a low rate. If you have average credit, choose a card with a higher rate.
- Lifestyle: Depending on what you want to do such as travel, you might want to consider looking at travel rewards credit cards. If you commute a lot, then take a look at gas rewards credit cards.
- Reviewing Rates: Select the cards and rates that you can afford. Also, be sure to check and make sure what rates credit card companies are offering. For example, if it says “introductory” it means it is a temporary deal and will change in the future.
Choosing a credit card doesn’t have to be an intimidating process if you have proper guidance. That’s where we come in! Now that you know some of the basics about credit cards and what to look for when choosing one.
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