Credit Cards 101: Understanding Your Credit, Credit Cards, and More

Credit scores range from 300 to 850, with higher scores indicating better credit health.

A good credit score is typically 700 or above, and it can affect the interest rates you're offered on credit cards and loans.

Having a credit score above 700 can also make it easier to get approved for credit cards and other lines of credit.

A credit score of 300 or lower is considered poor credit and can make it difficult to get approved for credit cards or loans.

Credit cards can be a convenient and secure way to make purchases online or in-store.

Your credit score is a numerical estimate of your creditworthiness, ranging from 300 to 850. It's based on five key factors: payment history, credit utilization ratio, credit age, credit mix, and new credit applications.

A good payment history is crucial, making up the largest percentage of your credit score. Paying your bills on time will help boost your score. I've seen friends struggle with late payments, and it's a big mistake – make sure to pay your bills as soon as possible.

FICO and VantageScore are two common credit-scoring companies, and they each have multiple scoring models. This means you might have more than one credit score, but both companies' most popular scores range from 300 to 850.

The three major credit bureaus are Equifax, Experian, and TransUnion, which collect your credit information from a wide range of sources and create your credit reports.

These credit bureaus play a crucial role in determining your credit score, as they are the ones who gather and analyze your credit history.

They collect information from various sources, including credit card companies, loan providers, and even public records.

This information is then used to create your credit report, which is a detailed record of your credit history.

Equifax, Experian, and TransUnion are the ones you'll be dealing with when you apply for credit or loans, so it's essential to know how they work.

Your payment history is the most important factor in determining your credit score, making up the largest percentage of your score. This is because it shows lenders how well you've handled your bills in the past.

Carrying a balance on your credit card can negatively affect your score, but making timely payments is one of the best ways to improve it. Paying more than the minimum payment or paying the balance in full each month is even better.

Your credit utilization ratio is also a key factor in determining your score, and it's calculated by dividing the amount of credit you're using by your total available credit. Keeping this ratio low is essential for maintaining a good credit score.

Here are the five factors that affect your credit score, along with a brief description of each:

Credit cards can be a great way to improve your credit score, but it's essential to use them responsibly. By making timely payments and keeping your credit utilization ratio low, you can show lenders that you're a responsible borrower and improve your credit score over time.

Credit card issuers must offer a grace period of at least 21 days before interest on purchases can begin to accrue.

Paying off balances before the grace period expires is a good practice when possible, as it can save you from interest charges. This is especially important if you're carrying over previous unpaid balances from the previous month.

Your credit limit will depend on factors such as your income, other debts, and how much available credit you have on other cards. It's essential to understand your credit limit to avoid overspending and accumulating unnecessary debt.

Adjusted balance is a crucial concept to understand when managing your credit card account. The issuer may subtract payments or credits received during the current billing period from the balance at the end of the previous billing period to calculate the adjusted balance.

You have until the end of the billing period to pay your balance and avoid interest charges. This is known as a grace period.

Paying just the minimum every month is the most expensive option, as it will cost you the most in interest. To avoid this, try to pay in full each month, which also gives you a grace period to avoid paying any interest on purchases.

Your credit card issuer reports your payments to the credit bureaus, which affect your credit score. Payment history counts for 35% of your credit score, so making timely payments is essential.

Here's a summary of the key points to keep in mind:

Annual fees can be thought of like membership dues, where you're charged a fee for keeping your credit card account open.

Not all credit cards charge an annual fee, but some do, and these fees can range from $50 to $700.

You can take full advantage of perks and rewards to offset the cost of an annual fee.

Some credit card companies charge a fee each year for keeping your credit card account open, which may cut into the rewards you earn.

Discover has no annual fee on any of its cards, making it a great option for beginners who don't want to worry about covering an additional fee.

Credit cards can come with costs, but you can avoid most of them with responsible use. They include interest payments, annual fees, late payment fees, balance transfer fees, and foreign transaction fees.

Interest payments are the finance charge or interest rate you pay on purchases when you carry a balance on your credit card. It's calculated as a yearly rate, so if you want to know what percentage you would pay each month in interest, divide the APR by 12 months.

Annual fees can be worth paying if the card gives you rewards and perks that make up for the cost, but in most cases, you shouldn't pay a fee just for the privilege of having the card in your wallet. Some cards charge annual fees, from around $20 to hundreds of dollars.

Late payment fees can be costly, with federal regulations limiting how much late fees can be. As of 2018, first-time late fees were capped at $27; and fees for a second late payment within six months were limited to $38.

Balance transfer fees generally range from 3% to 5% of the amount of debt transferred, but some cards may waive the fee when you transfer debt within a certain time frame.

Annual fees can range from $50 to $700, and it's essential to weigh the benefits against the costs. Some credit cards offer rewards and incentives that can offset the annual fee, but it's crucial to calculate whether the rewards are worth the fee.

Annual fees are like membership dues, and your issuer may bill your account for them. Not all cards have an annual fee, so it's worth exploring options with no annual fee.

To avoid annual fees, look for credit cards with no annual fee, like Discover's cards. This can be a significant savings, especially for beginners who don't want to worry about covering an additional fee.

Annual fees are just one of the costs associated with credit cards. Annual percentage rate (APR) is another key factor to consider, and it can be as high as 24% or more.

Credit cards can be a convenient way to make purchases, but they also come with interest charges if you don't pay your balance in full each month.

If you don't repay your statement balance in full, your card issuer may charge you interest fees on purchases, with interest rates varying by type of transaction.

The annual percentage rate (APR) is the finance charge or interest rate you pay on purchases when you carry a balance on your credit card, calculated as a yearly rate.

Most credit cards have a variable APR, which means it's tied to an index, such as the prime rate, and can change based on the type of transaction.

To avoid paying interest on purchases, you need to pay your credit card bill on time and in full, taking advantage of the grace period that allows you to avoid paying interest on purchases.

If you don't pay the minimum payment by the due date, you'll be charged a late payment fee, which can be costly, with first-time late fees capped at $27 and fees for a second late payment within six months limited to $38.

Interest charges on unpaid balances are usually imposed approximately one month after a purchase is made, unless there's a 0% APR introductory offer in place.

Daily interest accrual can lead to higher interest charges, so it's essential to understand whether your issuer accrues interest daily or monthly.

Paying in full each month can help you avoid paying interest on purchases, but if you pay less than the full credit card statement balance, the remaining balance will "carry" or "roll" over to the next billing statement, starting to accrue interest daily.

Capital One doesn't charge a fee if you exceed your credit limit. This is a relief for many cardholders who may occasionally go over their limit.

If your account has access, you can use the Confirm Purchasing Power tool to check if an over-limit purchase may be approved. This can give you peace of mind when making big purchases.

You can also disable the ability to spend over your credit limit in your over-limit preferences. This feature allows you to take control of your spending habits and avoid going over your limit altogether.

Most major credit cards are issued by banks, credit unions, or other financial institutions, and they often offer incentives such as airline miles, hotel room rentals, and cash back on purchases.

Rewards credit cards are a type of credit card that offers these incentives, and they're generally easier to get than unsecured credit cards. Secured credit cards, on the other hand, require a security deposit upfront equal to the credit limit, but they can be a good option for people with limited or poor credit histories.

Store credit cards are issued by national retailers and can only be used to make purchases from the issuing retailers, but they often offer perks such as special discounts and promotional notices. Some large retailers also offer co-branded major Visa or Mastercard credit cards that can be used anywhere.

Here are some common types of credit cards:

No-annual fee credit cards are available, but they often don't offer a ton of perks and rewards. On the other hand, credit cards with annual fees can offer more extensive rewards and benefits, but you'll need to pay a yearly fee to access and use the card.

Rewards credit cards give you something back for each purchase you make. They require good credit and come in different types.

You can earn rewards like cash back or miles, as a percentage of your purchases, such as 1%, 2%, or 5% cash back.

Cash back cards give you money back, which you can usually get as a check or a deposit into a bank account, or use to reduce your balance.

Store credit cards reward you for loyalty by giving you discounts or other benefits for shopping at the store that provided the card.

Airline credit cards and hotel credit cards give you miles or points that you can redeem for free flights or stays with the card's partner airline or hotel chain.

General travel cards give you points that you can use to pay for any travel expense. They're more flexible than branded airline or hotel cards.

Rewards cards are ideal for cardholders who pay their bill in full every month. If you carry a balance, interest charges will nip away at the value of rewards.

Here are some examples of rewards and benefits you might find with a credit card:

Paying your credit card bill on time and in full every month is essential for building responsible financial habits. This helps establish a good credit history and can even lead to affordable borrowing in the future.

A credit card's annual percentage rate (APR) is typically higher than other forms of consumer loans. This means interest charges on unpaid balances will be imposed approximately one month after a purchase is made, unless there's a 0% APR introductory offer.

To avoid interest charges, pay off balances before the credit card issuer's 21-day grace period expires. This grace period is a law that credit card issuers must follow, giving you time to settle your bill before interest starts accruing.

Keeping your balance below 30% of your available credit is a good practice for maintaining a healthy credit score. This low utilization rate helps ensure you can pay your bill in full and avoid paying interest on purchases.

Paying the minimum payment by the due date is not enough to count as an on-time payment. You must pay the full balance to avoid interest charges and late payment fees.

Here are some key takeaways to keep in mind:

To apply for a credit card, you typically need to be at least 18 years old, have a Social Security Number, and meet income requirements. Some credit card issuers also accept Individual Taxpayer Identification Numbers as an alternative.

To get ready to apply, review the credit card issuer's requirements and take note of any necessary documents or information. You can also check your credit score to get a sense of which cards you may qualify for.

You can apply for a credit card online, by phone, or in person, depending on the issuer's preferences. To manage your credit card, pay your bill on time and in full every month, keep your balance below 30% of your available credit, and review your account online weekly to track spending and avoid fraud.

Here are some key things to keep in mind when managing your credit card:

Remember, using a credit card responsibly is an easy and efficient way to establish healthy credit. With time and practice, you'll become more comfortable managing your credit card and making smart financial decisions.