Credit cards are a popular way for people to make purchases and manage their finances. In the U.S., more than 80% of people own at least one credit card. But how do credit cards work, and what should you know about them? Here’s a basic rundown of credit cards and their benefits.
How do credit cards work?
When you use a credit card, you’re borrowing money from the card company to pay for your purchases. This borrowed money must be paid back either in full every month or over time, with interest. The average credit card charges about 20% interest these days, so it’s essential to understand that using a credit card is not free.
Approval and Credit Limit
To get a credit card, you must first be approved by the bank. This approval depends on your credit score, which is based on your credit report and related credit activity. The bank will then authorize a credit limit, which is the maximum amount of money you can borrow. The credit limit is based on factors such as your income, other debts, and available credit on other cards.
Your credit score ranges from 400 to 850 and is vital in determining your financial trustworthiness. This score affects not only your credit card approval but also your credit card limit and interest rate on loans, mortgages, and the terms given by lenders. Insurance providers, landlords, and employers might also want to check your credit score.
Building Credit History
The simplest way to build your credit history is to get a credit card, use it, and make payments on time. Regular use and on-time payments will improve your credit score, making it easier for you to access credit in the future.
Credit cards are a useful tool for managing finances. Still, it’s essential to understand how they work and the responsibilities that come with using them. Make sure to build your credit history by using your card responsibly and making timely payments. Make sure to only use a credit card if you can repay the borrowed money.
Building Credit History and Choosing the Right Card
The simplest thing to build your credit history is to get a credit card, then use it, and pay it on time. Your credit score, which ranges from 400 to 850, affects whether you’re approved for a credit card, and your credit limit, interest rate on loans, and the terms lenders may assign you. Insurance providers, landlords, and employers might also check your credit score.
There are many types of credit cards, including standard credit cards, rewards cards, student cards, business cards, and more. Choosing the right card for you is essential based on your circumstances. For example, if your family spends a lot on groceries, consider a card that gives you 5-6% cash back on groceries. On the other hand, if you want to build your credit history, consider a standard credit card.
|Student credit cards
|Low interest rates, no annual fee, and rewards programs
|Secured credit cards
|Easy approval, helps build credit history, can lead to unsecured credit card
|Rewards credit cards
|Offers rewards and cashback, can help build credit history
|Cash-back credit cards
|Offers cashback on purchases, can help build credit history
|Travel credit cards
|Offers travel rewards and perks, can help build credit history
Are you considering taking out a mortgage in the near future? Make sure your credit history is in order by reading our article on everything you need to know about mortgages in the UK.
When choosing a credit card, consider your spending habits and which perks will save you the most money. For example, if you’re a diehard Swiftie, look for a card that gives you discounts on concert tickets. If you’re a frequent traveler, consider a card that gives you rewards for flights, hotels, and rental cars. If you’re a foodie, look for a card that offers you dining rewards.
It’s also important to consider your credit limit and spending ratio. It would be best if you tried to keep your credit usage at 30% or less of your available credit. To avoid lowering your credit score, consider having two or more credit cards with different credit limits.
With a bit of thought and planning, you can make the most of your credit cards and build your credit history. When using a credit card, track your finances on an Excel spreadsheet or using an app(s) like Mint or PocketSmith. Redeem your rewards regularly as they can lose value to inflation over time.
Maximizing Rewards and Managing Credit Cards
Credit cards can offer a lot of benefits if used correctly. One of the biggest perks of credit cards is the rewards system. Credit card companies offer rewards to incentivize consumers to use their cards. There are many ways to maximize these rewards.
Here are some tips for getting the most out of your credit cards:
- Understand your spending habits: To get the most out of your credit card rewards, knowing where you spend the most money is essential. If you spend a lot of money on groceries, look for a credit card that offers high cash back on grocery purchases. If you travel often, consider a card that offers travel rewards.
- Transferable points: Some credit cards offer transferable points that can be used with different airlines and hotels. This opens up many options for traveling, so it’s worth considering if you’re a frequent traveler.
- Cash back: According to a recent survey, cash back is the most popular reward among Americans. With the current high inflation rate, extra money can come in handy.
- Use your rewards: It’s essential to use your rewards as soon as you can, because they can lose value over time. In some cases, programs can change the rules and it may take more points or miles to get the same rewards.
- Track your finances: To make the most of your credit cards, it’s essential to keep track of your spending and credit card balances. Use an app or spreadsheet to keep track of your assets, debt, and liabilities.
- Pay in full: If you carry a balance, it’s essential to seek out a 0% balance transfer card or stick to a low interest rate card until you’re debt-free.
- Evaluate your credit cards: Reevaluate your credit cards at least once a month to ensure you’re getting the best rewards and terms.
By following these tips, you can maximize your credit card rewards and manage your credit cards responsibly. Remember, only use a credit card if you can use it responsibly and pay the balance in full monthly.