When used responsibly, a credit card can help you finance new purchases, shop securely or earn rewards in exchange for spending. But with high APRs and a range of fees, they can also be risky. Here’s a closer look at modern credit cards and what you need to know about them.
Some loans – such as purchases you make on a charge card – are expected to be repaid quickly. For example, a charge card requires you to pay off your purchases in full when you receive your monthly bill.
Other loans, such as credit cards, give you more time to pay off your purchases and only require you to pay a minimum amount each month. In exchange for allowing you to carry over your debt from month-to-month, your credit card will charge you interest.
The amount of interest you’re charged will depend on the card you choose and your credit history. For example, travel cards tend to charge higher amounts of interest. So do cards that are designed for consumers with low credit scores.
Unlike charge cards and installment loans, credit cards give you a revolving line of credit (often called your credit limit) that allows you to borrow up to a certain amount.
For example, if you have a $5,000 credit limit, you’ll be allowed to charge any amount you want, up to that $5,000 limit. However, you won’t be able to charge any more than $5,000 until you’ve paid down your balance or have been given a credit limit increase.
Common credit card charges
Most credit cards charge a wide range of fees. However, the fees are typically tied to optional services, such as balance transfers, cash advances and revolving balances. As a result, you may not have to pay any fees at all if you use a no annual fee credit card, pay off your purchases in full each month and only use your card to make new purchases.
Here are some common charges you might encounter on your credit card:
- Standard APR: Your annual percentage rate (APR) determines the amount of interest you’ll be expected to pay if you carry a balance from one month to the next. Most credit cards are variable-rate credit cards, meaning their APRs are tied to a benchmark interest rate called the prime rate. However, some cards are fixed-rate credit cards and so their APRs are unaffected by the prime rate.
- Balance Transfer APR: If you transfer an old balance to your new credit card, your balance transfer APR will determine how much interest you’re charged on your transferred balance.
- Cash Advance APR: If you borrow cash from your credit card – for example, by writing a credit card check or taking out cash from an ATM – you’ll be charged a special cash advance APR that’s often significantly higher than your regular APR.
- Penalty APR: Your credit card issuer may also charge a higher APR, called a penalty APR, if you fall behind on payments.
- Annual fee: Some credit cards charge a fee just for owning the card. For example, if you open a rewards card with extra generous benefits or get a secured card for consumers with bad credit, you may be charged an annual fee.
- Balance transfer fee: If you transfer debt onto your new credit card, your card issuer may charge you a percentage of the total amount you transferred. Balance transfer cards usually charge a fee of $5-10 or 3-5% of the transferred balance.
- Cash advance fee: Your card issuer will also charge you a percentage of the amount you borrowed if you take out a cash advance.
- Foreign transaction fee: Some credit card issuers also charge a percentage of any transaction that you make abroad or in a foreign currency. Foreign transaction fees tend to be 3% of the purchase. If you’re going to be traveling overseas, a card with no foreign transaction fees can help you save.
- Late payment fee: Your credit card issuer may also charge you a fee each time you pay your bill after your payment due date. Under federal law, a late payment fee can’t exceed $40.
See related: Picking the right credit card
Credit card benefits and promotions
Many card issuers also add special promotions and benefits to their credit cards in order to attract new customers and encourage existing cardholders to continue using their cards. As a result, your card may offer:
- An introductory APR: Some credit cards offer new cardholders a low or 0% APR on new purchases for a set period. For example, a card may offer to temporarily waive interest for a year or more.
- An introductory balance transfer APR: Some credit cards also offer a promotional interest rate on balances you transferred from other loans or cards. For example, you may be given a year or more to pay off the transferred balance before you’re charged any interest.
- Fee waivers: To attract customers, some credit cards waive common fees, such as balance transfer fees or foreign transaction fees.
- Rewards: Many cards also offer a rewards program. For example, you may be offered cash back, points or travel miles in exchange for using your credit card.
- Sign-up bonuses: Some credit cards also offer a one-time rewards or cash back bonus when you first sign up for a credit card. They often require you to spend a certain amount in a set time period in order to receive the bonus.
- Ongoing bonuses: A credit card may also offer other kinds of bonuses throughout the year. Depending on the card, you may receive a bonus when you redeem your rewards or when you spend a certain amount.
- Credit card benefits: In addition, many credit cards offer purchase protection and travel insurance benefits, such as extended warranty, car rental insurance and travel accident insurance. Most cards also offer zero liability fraud protection, so you don’t have to worry about losing money if your card information is stolen.
- Additional card perks: Some rewards cards with annual fees also offer other credit card benefits, such as travel credits, airport lounge access and more.
Credit cards are also subject to a number of consumer protection laws, including:
- The Credit CARD Act of 2009: This law offers a number of protections for consumers, including protection from sudden rate increases and excessive fees.
- The Fair Credit Billing Act: Among other protections, this law gives consumers the right to dispute fraudulent or inaccurate charges.
- The Fair Credit Reporting Act: This law gives consumers the right to access their credit reports once per year from each of the three credit bureaus – Equifax, Experian and TransUnion – for free through AnnualCreditReport.com and dispute errors on their reports.
See related: 8 things you must know about credit card debt
How to get a credit card
You’ll need an established credit history, with a track record of on-time payments, in order to qualify for most credit cards. However, some credit cards are easier to get – even if you’ve never used credit before.
Secured credit cards are designed to help cardholders build a positive credit history. In exchange for a refundable deposit to help secure the loan, you’ll be given a card that you can use to make a limited number of purchases. Over time, you’ll build a positive credit history by making on-time payments.
Once you’ve built up a track record of using credit responsibly, you’ll eventually be able to qualify for other cards – including cards that offer rewards and other benefits.
Kelly Dilworth is a former staff reporter at CreditCards.com. She began her career in journalism at The Atlantic in 2007, then detoured into nonfiction book publishing for several years. She returned to journalism in 2010 and since then has written about everything from 20-somethings with Herculean credit scores to the Federal Reserve’s monetary policy decisions.
Credit cards. A number of different images may flash through your head when you hear those two little words. Do you picture yourself freezing your card in a block of ice? Putting it through a shredder? Lighting it on fire?
Or do you see yourself casually strolling out of a store, shopping bags in hand, feeling elated about all the fabulous things you just bought and didn’t have to pay for…(yet)?
Either way, credit cards are a polarizing topic that seems to divide people faster than Donald Trump’s tweets. Some people equate credit cards with financial disaster and endless debt. Others view them as a way to build credit and save money through cash back and perks. Personally, I fall somewhere in the middle of the spectrum. Here’s a few of my own pros and cons of credit cards that will (hopefully) help you decide if owning a credit card is a good financial decision for you.
Let’s start with the bad news first.
Con #1: CREDIT CARDS CHARGE INTEREST – LOTS OF IT!
You’re probably thinking, “DUH.” But, let’s just say it like it is. The #1 reason why credit cards have a bad reputation is the high interest charged on unpaid balances. Even though most people know credit cards can charge high interest, many overlook the details. For example, exactly how much interest is your credit card charging? When does interest begin to accrue? On what amount does the interest apply? Does your credit card offer a grace period? All of these details can be found in the fine print, usually in confusing legalese than can make you feel like a chimpanzee trying to do calculus. In summary, the best way to avoid interest altogether is pay your full credit card balance on time every month. If you don’t, you’ll be that chimpanzee trying to do calculus to figure out how in the world your $200 new TV (it was such a great deal!) ended up costing you $500 (OUCH).
(Also, side note, there is a myth floating around out there that you need to carry a balance on your credit card and pay interest in order to earn good credit. This is absolutely false. Carrying a balance may hurt you, not help you. That’s all. Carry on).
Con #2: Credit Cards Can Be The Gateway Into A Deep Dark Debt Hole
Credit cards can be the gateway drug into a seriously dangerous debt problem. Why? Because they are so easy to obtain and so easy to use. Here’s a personal example for you. When I started my first job out of college as a social worker, I was making about $32,000 per year. I signed up for my first credit card and was given a credit limit of $4,000. Wow – $4,000! That’s a lot of cash! My credit card company must think I’m really responsible…
HOLD UP. Let’s do some math: Say my hypothetical take-home pay (after tax) was $28,000 annually. $28,000 / 12 months = $2,333 net monthly income. With a credit card limit of $4,000, I could choose to max out the credit card in the first month, buying a $4,000 all-inclusive vacation to Hawaii. Aloha to me!
The problem is, in order to pay the balance off, I would have to use my entire $2,333 paycheck over the next few months to pay off the full credit card balance. This is nearly impossible, because I would have no extra cash left over to pay for rent, food, transportation, clothes, or anything else for that matter. As a result, that remaining unpaid balance gets carried over from month to month – and is charged interest in the meantime. And that, ladies and gentlemen, is why credit cards can be a gateway drug. Easy to obtain. Easy to use. Easy to spiral out of control.
Thankfully, I didn’t fall into this debt trap. I never used more than 25% of my credit limit and made sure I could pay the balance in full at the end of every month. Ironically, because I was using my credit responsibly, I received about five credit card offers in the mail every week and was offered a credit limit increase. All of this is great until too much of a good thing becomes a bad thing. It can be easy to become addicted to borrowing money – even if you are responsible with paying it back. Having $10,000 in debt and a great credit score is still not as good as having no debt at all.
Con #3: Credit Cards Aren’t Necessary
That’s right. You don’t need ‘em. In today’s culture, having a credit card is equivalent to having a cell phone. If you don’t have one, you’re living in the dark ages. But in reality, you really don’t need a credit card – especially if you’re able to build up credit through other sources, like student loan payments. Side note: credit cards + social media = disaster waiting to happen. Why? When we constantly see posts of people taking luxurious vacations, buying a new home, getting their dream car, or wearing designer clothes, we often (even subconsciously) feel like we’re missing out. In order to “keep up with the Jones’,” we swipe our credit cards to pay for a lifestyle we can’t afford. Guess what. A lot of people who appear to have it all on social media may actually be drowning in debt to keep up with the image they want to portray. Don’t fall into that trap. (Okay, I’ll get off my soapbox now. Thank you for coming to my TedTalk).
And now for the good news:
Pro #1: Credit Cards Help Build a Good Credit Score
This is true – IF (and that’s a big IF) you diligently pay your full balance each pay period. And, as stated in Con #3, you really don’t need a credit card to build up your credit score. Other methods of building credit include paying off student loans, getting a secured loan or secured credit card (backed by your own pre-deposited money), or becoming an authorized user on someone else’s credit card (ideally someone with good credit history). In fact, I would argue that building credit through one of these methods is a much safer option than diving head first into an unsecured credit card.
As a disclaimer, here is my personal story. I graduated college without any student loans, and I will remain eternally grateful to my parents for their sacrifice to make that happen. As a result, I vowed to never put myself into unnecessary debt, since my family worked so hard to keep me out of it. But, this also meant I had no credit to my name. I started with one universal credit card with no annual fee and some small perks. I only used this card for a few designated expenses, like rent and gas, so my spending wouldn’t get out of hand. Over the next couple years, I paid this card on time each month and also added a couple store cards as well. I was able to build a solid credit score in a relatively short period by consistently paying the full balance, using different lines of credit, and keeping my credit limit usage under 25% at all times. BUT, this is my personal story. It is not the universal solution to building credit. Find a method that works best for your personal financial situation.
Pro #2: Credit Cards Provide Points and Perks
If I’m being honest, this Pro could also be a Con. Here’s why: while most credit cards offer some incentive for use (like cash back or airline miles), the benefits may not outweigh the expenses. For example, if you have an airline credit card with a $100 annual fee, but you only take 2 flights per year to earn $50 in airline miles, then you really lost money by using the card (especially if you were charged interest on unpaid balances from month to month). Make sure if you’re purchasing a card with an annual fee, you calculate whether or not the annual fee will produce enough benefits to justify the cost.
NerdWallet has an excellent credit card comparison tool to help narrow down which credit card will be the best fit for your lifestyle. (#NotSponsored). In fact, I used this tool to find my first two credit cards, based on my spending habits, credit score, and desired benefits. One of the cards I decided upon is the Amazon Prime Visa card (Again, #NotSponsored. But, Amazon, if you wanna slide in my DMs…)
I already buy the majority of my essentials on Amazon, everything from dish soap, to cat food, to breakfast bars. By using the Amazon Prime credit card to make these purchases, I also earn 5% cash back on these transactions and 1% back on everything else. What makes this really valuable is, nearly every time I go to order some of these essentials Amazon, I have anywhere from $5-$25 cash back to use toward my purchase. Again, this is what works best for me, but it may not be the best fit for you. Try out the NerdWallet calculator to find your best credit card fit.
Pro #3: Credit Cards Teach Financial Discipline
Just because you could eat a whole box of donuts in one sitting doesn’t necessarily mean you should.
Similarly, just because you could spend your full credit limit in one month doesn’t mean you should. Using credit cards effectively requires discipline and discernment. Many people get themselves in deep debt trouble when they begin to disassociate their actual cash money from the motion of swiping their credit card. In other words, it’s easy to forget about the pain of paying for purchases when you have the ability to enjoy something instantly without paying a single penny upfront. Credit cards themselves are not the enemy. It’s the emotional and psychological response of purchase without pain that gets us in trouble. The good news is, we have the ability to acknowledge the mental pitfalls of credit card usage and shift our mindset to avoid them. Here’s a rule I personally follow to keep my finances in perspective: I never make a credit card purchase if I don’t have enough money in my checking account to cover it immediately. Credit cards make it easy to spend money we don’t have, but they don’t need to lead to financial ruin. A shift in mindset and a healthy dose of discipline is all you need to make sure your credit cards are working for you, not against you.
**P.S. If you read this and thought, “Well, shitake mushrooms. I’m already up to my eyeballs in credit card debt. Now what?” No fear! We will be tackling debt reduction planning in our future content very soon!
Written By: Kaitlyn Duchien
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