Making Borrowing Decisions

A credit card is a revolving line of credit that allows you to borrow money up to a pre-set limit. You can use a credit card to pay for your living expenses, but you must make at least the monthly minimum payment. If you do not pay the entire balance by the end of the grace period, you will be charged interest on the unpaid balance. Credit cards may also charge annual fees and late payment fees.

Characteristics of Credit Cards

Here are some of the key terms associated with credit cards:

• Credit Limit: The maximum amount of money you can borrow on your credit card.

• Overdraft Protection: A service that allows you to make purchases even if you have exceeded your credit limit. This may involve paying a fee or having your bank transfer money from another account to cover the purchase.

• Annual Fee: Some credit card issuers charge a fee each year for the privilege of having their card.

• Grace Period: The period between the purchase date and the payment due date, during which you do not have to pay interest on your purchases.

• Interest Rate: The percentage of interest charged on your outstanding balance each year.

• Cash Advances: The ability to withdraw cash from your credit card. This may involve paying a fee, and interest begins to accrue immediately.

Understanding these terms is essential for using your credit card wisely and avoiding unnecessary fees.

Advantages and Disadvantages of Using Credit Cards

It is important to be aware of the advantages and disadvantages of using credit cards before applying for one. Using your card responsibly can be a valuable tool for building your credit score and managing your finances. However, if you are not careful, it can also lead to financial problems.4

Types of Credit Cards

There are two main types of credit cards: bank credit cards and store credit cards.

Bank-issued credit cards

Banks, credit unions, or other financial institutions issue bank credit cards. They can be used anywhere that accepts the card's network, such as MasterCard, Visa, Discover, or American Express.

Store-issued credit cards

Retailers can issue credit cards that can only be used at the retailer who issued the card. For example, a department store or gas station credit card can only be used at that store or gas station (e.g., Target RedCard, Shell Card).

FYI: Some large retailers also offer co-branded major Visa or Mastercard credit cards that can be used anywhere, not just in the retailer's stores. For example, the Walmart Mastercard can be used at Walmart and anywhere else that accepts Mastercards.

Credit Cards With Rewards for Everyday Purchases

A rewards credit card offers customers travel rewards and other perks with everyday purchases. There are many credit cards available with rewards programs available.

Travel credit cards offer rewards like points or miles that can be redeemed for flights, hotel stays, and other travel expenses. These cards often have annual fees but can be worth it if you travel frequently. To learn more, read How Do Travel Credit Cards Work?

Entertainment credit cards offer rewards for spending on entertainment, such as movies, concerts, and sporting events. These cards often have lower annual fees than travel cards but may offer fewer rewards.

Factors to Consider When Choosing a Credit Card

• The Rewards Program: Some credit cards offer cash back, travel, or other rewards.
  
  
• The Interest Rate: The interest rate is the percentage of interest you will be charged on your outstanding balance if you do not pay your bill in full each month.
  
  
• The Annual Fee: Some credit cards have a yearly fee, while others do not.
  
  
• The Credit Limit: The credit limit is the maximum amount of money that you can borrow on your credit card.
  
  

Credit Card Payments

Minimum payments are the smallest amount you can pay on your monthly credit card bill without incurring late fees or other penalties. However, even if you pay the minimum, you will still be charged interest on your outstanding balance. The amount of your minimum payment will vary depending on your credit card issuer and your credit card agreement. You can find your minimum payment on your monthly credit card statement.

What Is a Minimum Payment?

Compounding interest can work wonders for your savings, but it can also work against you if you carry credit card debt. When you only make the minimum payment on your credit card, you essentially pay interest on your debt and draw on your interest. This can quickly snowball your debt and make it much harder to pay off.

How to Use Your Credit Cards Responsibly

Here are some tips on how to use your credit cards responsibly:

• Limit the number of credit cards you have.

  • Having too many credit cards can make it challenging to track your spending and lead to overspending.

• Pay your credit card balance in full each month.

  • This is the best way to avoid paying interest on your purchases.

• Be aware of your APR and all fees.

  • This information is typically found on your credit card statement.

• Limit cash withdrawals.

  • Cash withdrawals typically have high finance charges, so it's best to avoid them if possible.

• Read your credit card statement carefully.

  • This is important to ensure there are no errors and to dispute any charges you do not recognize.

• Pay attention to your credit utilization.

  • Your credit utilization is the percentage of your credit limit that you are using. Keeping your credit utilization low is important, as this can impact your credit score.

By following these tips, you can use your credit cards responsibly and improve your financial health.