Basic Credit Card Information 101

Top ten things you need to know about credit cards.

  1. You probably want one or more credit cards. Used responsibly, a credit card gives you many benefits, including consumer protections as well as improved cash flow / rewards, that are not available from other payment sources. We’ll explain “used responsibly” as we go. You do not have to pay interest to get these benefits.
  2. Your debit card is not a credit card. If your bank gave you a card just for opening your account, it’s a debit card, not a credit card even if it says “Visa” on it. You have to apply to get a credit card. Debit cards take money from your checking account immediately. Credit cards don’t.
  3. A credit card is a pre-approved loan up to your credit limit, which lenders come up with based on your application. As loans, credit cards build your credit history when you use them, and can help your credit score if you don’t borrow much and pay it back every month. This is one of the few ways to build credit for no cost.
  4. The grace period is your friend. If you are paying off your statement balance each month, you will not be charged any interest on new charges. This can be up to six weeks, thus the cash-flow benefit. But beware: if you don’t pay off the balance, your grace period is gone, and all new charges will accrue high interest, until you again pay off the statement balance. There is no difference to the card company if you pay once / month or multiple times / month, though it may reduce your credit utilization which is usually good.
  5. The 20%+ annual APR common to credit cards is NOT your friend. You want to avoid this at all costs. This means you never charge more than you can pay off each month, even if you still have credit limit left :). While the “minimum payment” may not seem that bad, if you paid off a credit card balance using only minimum payments, you would pay up to three times as much for everything as if you paid it off immediately. If you find yourself shopping for lower APR, like 15%, that’s still bad, since you shouldn’t be paying interest at all.
  6. More credit is granted to people with good credit. What if you have no credit? To get started, you should look for a card designed for people with no credit, like a secured credit card, or something from your bank or credit union. With a secured card, you are basically borrowing your own money, since you put down the money to back your credit limit. It’s like training wheels, or a learner’s permit. Once you have shown you can do this, then you can use other people’s money. Not much to start, though; initial credit limits are usually below $1000. It’s possible to get $20,000+ limits on a card if your history is good enough.
  7. More credit cards is usually better, eventually. Go slow, though; maybe 1/year to start. Getting a new card increases your available credit, and increases your number of accounts, both of which help your credit score. This at the cost of an inquiry, which will be less-than-helpful for a couple of months. Note that requesting a credit limit increase sometimes produces an inquiry as well. There is no such thing as too many credit cards from a score standpoint, but taking out a lot of credit in a short period of time makes you look like a bad credit risk. You also don’t want to have more cards than you can manage. Forgetting to make a payment is bad. Closing a credit card won’t help your credit score.
  8. Zero-percent promotional rates are good but can be risky. Once you have a credit history, you’ll eventually be offered zero-percent promotional rates. These are generally speaking good for you, especially if you would otherwise be paying interest. In some cases you can even transfer balances from other cards. Just remember you need to pay everything off, and that’s easier said than done. The card companies hope you don’t. Be aware of the difference between promotional 0% and deferred 0%, as well.
  9. Rewards are a good thing. Once you have a good credit history, you will be able to get rewards cards that rebate 1%+ of your credit card expenses you. (Merchants pay this indirectly, as a portion of the 2-3% fee taken from them when you use your card.) You want to do this. Some cards offer extra rewards for initial spending to get you to apply. If you can get the extra reward, it’s usually worth it.
  10. Reminder to be responsible. Not everybody is. If you know you have limited self-control, then credit may not be for you. People who use credit may overspend on unneeded purchases. (“Hey, I’m getting rewards!”) Credit cards are not your emergency savings. Most of the saddest stories we have here at /r/pf are people who got $10,000 or even $50,000 in debt because they spent too much. Don’t let this be you. Be careful out there!

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