What Are Credit Cards Used For and How They Work

Credit cards are a convenient way to make purchases, pay bills, and earn rewards. They're essentially a loan from the card issuer, allowing you to spend up to a certain credit limit.

You can use credit cards to buy everyday items, like groceries or gas, as well as big-ticket items, like electronics or furniture. Credit cards also make it easy to pay bills, such as rent or utility bills.

To use a credit card, you'll need to apply for one and be approved by the issuer. They'll then send you a card with a unique account number and expiration date.

Once you have a credit card, you can make purchases by swiping or inserting the card into a payment terminal, or by entering the card details online.

Intriguing read: Can You Use Credit Cards to Pay Bills

Credit cards charge a higher annual percentage rate (APR) compared to other forms of consumer loans. This means you'll pay more interest on your balance if you don't pay it off in full each month.

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Credit card issuers must offer a 21-day grace period before interest on purchases can start to accrue. Paying off your balance before the grace period expires is a good practice to avoid interest charges.

Your credit limit is determined by your income, other debts, and available credit on other cards. This means you should only charge what you can afford to pay back.

Payment networks like Visa, Mastercard, and American Express process credit card transactions, ensuring the merchant gets paid and you're billed correctly.

Credit cards charge a higher annual percentage rate (APR) compared to other consumer loans.

You can avoid interest charges on purchases if you pay off your balance before the grace period expires, which is at least 21 days according to law.

Paying just the minimum payment every month is the most expensive option and will cost you the most in interest.

Your credit card issuer reports your payments to the credit bureaus, which means your payment history counts for 35% of your credit score.

Mistakingly switching from a monthly accrual card to a daily one can nullify savings from a lower interest rate if you're planning to transfer your credit card balance to a card with a lower interest rate.

Paying the whole balance in full each month gives you a grace period, allowing you to avoid paying any interest on purchases at all.

You must pay at least the minimum by the due date every month to avoid late fees and potential damage to your credit score.

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Your credit score is a three-digit number that can make or break your chances of getting approved for a credit card or loan. It's calculated by the three major credit bureaus: Experian, Equifax, and Transunion.

The FICO model is used by 90% of top lenders to measure credit scores, which range from 300 to 850. A high credit score means you're more likely to be eligible for lower interest rates.

Payment history and credit utilization make up a big part of your credit score. This means that making on-time payments and keeping your credit utilization ratio low is crucial.

Here's a breakdown of what your credit score can mean:

A high credit score can save you money in the long run, especially when taking out big loans for mortgages or car purchases.

Using a credit card responsibly is an easy and efficient way to establish healthy credit. You’ll be thankful that you did so when you're able to borrow affordably in the future.

To make the most of your credit card, it's essential to adopt good practices. Pay your bill on time and in full every month, and keep your balance below 30% of your available credit. This will help you avoid interest charges and maintain a healthy credit utilization ratio.

There are several types of credit cards to choose from, and the right one for you will depend on your individual needs and preferences. Consider your current credit cards, the type of rewards you prefer, and your financial goals. You can also use Bankrate's CardMatch tool to find personalized matches that fit your credit profile without a hard credit check.

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Credit cards offer a range of benefits, including rewards, fraud protection, and increased purchasing power. They can also be beneficial when traveling, as some major car rental companies and hotels require a hold on a credit or debit card to reserve a vehicle or book a room.

Some of the key benefits of using a credit card include:

If you're looking for a cash back credit card, consider options with no annual fee, but be aware that those with more generous bonus offers and rewards schemes may charge a modest annual fee. For example, the Blue Cash Preferred Card from American Express charges a $95 annual fee after your first year, but earns 6 percent cash back on U.S. supermarket purchases.

Credit cards may come with fees, such as annual fees, foreign transaction fees, balance transfer fees, and late payment fees. If you use your card responsibly, you can avoid some of the fees like late-payment fees.

Annual fees can be unavoidable, and you could be on the hook for them year after year. Discover, however, has no annual fee on any of its cards.

Promotions are common ways for credit card issuers to appeal to applicants. Common promotions include welcome bonuses, introductory APRs, or 0% APR on balance transfers.

Credit card fees can add up quickly, and it's essential to understand what you're paying for. Annual fees, like the one Discover has on some of their cards, can be unavoidable and will cost you year after year.

You can avoid late-payment fees by making your payments on time. This is a simple way to save money and avoid unnecessary charges.

Credit cards often come with foreign transaction fees, but Discover has no foreign transaction fee, making it a great option for international travel.

Credit card issuers often use promotions to attract new applicants. These can be a great way to boost your rewards or temporarily lower your interest rates.

Common promotions include welcome bonuses, introductory APRs, or 0% APR on balance transfers. Many promotions have a time-limit, so make sure you understand the terms before taking advantage.

Some promotions come with spending thresholds, requiring you to spend a certain amount of money to earn rewards. For example, sign-up points or miles may have a minimum spending requirement.

Introductory APRs and 0% APR on balance transfers can be a great way to save money, but they usually have a time-limit. This means you'll need to pay attention to the expiration date to avoid higher interest rates.

It's essential to read the fine print and understand the terms of any promotion before applying for a credit card.

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Keeping your credit card accounts in order is crucial for maintaining a healthy credit score. Length of credit history can affect up to 15% of your credit score.

It's a good idea to keep your oldest account open, as this will help increase the length of your credit history. Consider a no annual fee student credit card if you have the luxury of "student" status.

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Student cards have lower requirements to qualify yet often offer good terms, making them a great option for kicking off a credit history. Even if you get a second credit card a few years later, keep your student account open for as long as it's feasible.

If you no longer find a card useful, consider doing a product change to another card instead of closing the account altogether.

A unique perspective: Can I Use Student Loans to Pay off Credit Cards

Credit cards come in various types to cater to different needs and preferences. You can choose from rewards credit cards that offer incentives such as airline miles, hotel room rentals, and cash back on purchases.

If you're a frequent traveler, a travel credit card can be a great option. These cards offer rewards designed for travel, including flights, rental cars, and hotels. You can earn flexible credits or points that can be used toward any travel purchase or transferred to airline or hotel loyalty programs.

Related reading: Compare Southwest Airlines Credit Cards

If you're looking for a simple credit card, consider a no-annual fee credit card. These cards don't offer a ton of perks and rewards, but they can be a good option if you want a straightforward credit card. You can also opt for a secured credit card if you have limited or poor credit history, which often requires a security deposit.

Some popular travel credit cards include the Capital One Venture Rewards Credit Card, Chase Sapphire Preferred Card, American Express Gold Card, and Discover it Miles. These cards offer various rewards and benefits, such as flat-rate rewards, travel credits, and reimbursement for Global Entry or TSA PreCheck.

Here are some examples of credit cards for specific needs:

If you're looking for a credit card that offers rewards, you'll want to consider a rewards credit card. These cards are issued by banks, credit unions, or other financial institutions and often come with perks like airline miles, hotel room rentals, or cash back on purchases.

Store credit cards are another option, issued by national retailers and often easier to qualify for than major credit cards. However, they may only be used to make purchases from the issuing retailers.

Secured credit cards are a type of credit card that requires a security deposit, which is often refunded after responsible card usage. These cards are a good option for people with limited or poor credit histories.

A prepaid debit card is similar to a secured credit card, but with a linked bank account. Unsecured credit cards, on the other hand, don't require a security deposit or collateral.

Some credit cards come with annual fees, but they can offer perks like higher rewards rates or better interest rates. No-annual fee credit cards are also available, but they may not offer as many benefits.

Business credit cards are a great option for entrepreneurs and small business owners who want to keep their personal and business expenses separate. You can earn rewards on your business spending, just like with personal rewards cards.

For your interest: Which Business Credit Cards Report to Personal Credit

To qualify for a business credit card, you must own a business or income-producing activity, which can include gig work and side hustles. Many business credit cards offer a flat rewards rate for all purchases, while others offer bonus rewards on specific categories of expenses.

Some benefits to look for in a business credit card include a generous rewards program, expense tracking abilities, and features that can help boost your bottom line. A flat rewards rate can be a great option if you want to simplify your rewards earning.

Business credit cards usually let you redeem your rewards for cash back or travel. The Ink Business Unlimited Credit Card is an example of a business credit card that offers a flat rewards rate for all purchases.

Curious to learn more? Check out: Business Credit Cards That Don't Report to Personal Credit