Laura Edgar is a senior writer for NerdWallet.com, a consumer finance comparison website.
In some ways, credit cards have a competitive advantage over cash and debit cards. They’re safer for online and overseas purchases, and, when you make your payments in full every month, they’ll help boost your credit score. They may even give you rewards for the purchases you make every day. However, before you get one, it’s essential to know how credit cards work and which card fits best with your lifestyle. For people who are already struggling with debt, the best choice might be no credit card at all. Here’s what you need to know before you fill out that application.
Credit cards – the basics
Most people have a vague idea of how credit cards work, but not many people understand the details. Essentially, credit cards offer a revolving line of credit, letting you “buy now, pay later”. You are responsible for paying the card’s balance off in full, on time, every month, otherwise you’ll have to pay interest. If you only make the minimum payment every month, or don’t pay anything, your incur debt, and using your card can become very expensive, very fast. Credit cards are different from other payment cards because they make it easy to spend money you don’t have. A debit card deducts money from the existing balance in your checking account. A prepaid card only lets you spend money you have already loaded on the card.
Types of credit cards
All credit cards work the same way, but they offer different benefits. Most credit cards fall into one of four categories:
The main advantage of low APR credit cards, as the name suggests, is their lower-than-average interest rate. A card’s interest rate doesn’t matter if you always make your payments on time, but for many people, that’s just not realistic. A low APR credit card will help you pay less if you overspend.
Balance transfer cards let you transfer your balance from a different credit card and make your payments with 0% APR for a limited time. These cards make it easier to pay off your balance, because during the 0% introductory APR period, your debt will not accumulate any additional interest.
Rewards credit cards give you money, miles or points for your purchases. On the flipside, they typically have the highest interest rates, and the cards that offer the best rewards may come with an annual fee. If you have good credit and can make your payments on time, they offer the most bang for your buck. If you don’t make your payments on time, the interest you pay will easily cancel out the rewards you earn.
If you’re just starting to build credit, or can’t qualify for a regular credit card, you’ll probably be eligible for a secured card. Instead of using your credit score as “proof” that you’ll make your payments, you submit a deposit, which is refundable when you cancel your card and upgrade to a better one.
Other important things to remember:
- Don’t apply for more than one credit card at the same time. When you send in multiple applications in a short time frame, this looks suspicious to credit bureaus.
- Keep your credit card information private to prevent identity theft.
- Most of the time, it’s best to keep your credit card accounts open.
- Older accounts will positively influence your credit score.
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