Everything You Need to Know About Credit Cards
August 2, 2024
Credit cards are powerful tools for building credit, managing your finances, and earning cash back rewards. However, they can also lead to financial pitfalls if not used wisely. Understanding how credit cards work and the different types of cards available is crucial to making informed decisions. We are here to help you learn everything there is to know about credit cards.
What is a Credit Card?
A credit card is issued by financial institutions and allows cardholders to borrow money to pay for purchases. Key elements of a credit card include:
Credit Card Number: A unique 16-digit number identifies your account when making transactions.
Cardholder Name: Your name as it appears on the card.
Expiration Date: The date after which the card is no longer valid.
How Does a Credit Card Work?
Credit cards enable you to make purchases on credit, offering a convenient alternative to cash or debit cards. Understanding how they work, including key terminology, can help you manage your finances effectively.
Credit Limit: The maximum amount of money you can borrow at time. This limit is determined by factors such as your income and credit score.
Annual Percentage Rate (APR)/Interest Rates: The yearly cost of borrowing, including interest and fees. Understanding your APR is essential because it impacts the cost of carrying a balance on your card.
How does your Credit Card affect your credit score?
Your credit card usage significantly impacts your credit score, which is a numeral representation of your creditworthiness. Key factors include:
Payment History: Illustrates the timeliness at which payments have been made over the length of time your credit has been open and used. Timely payments build a positive history, while late payments can damage your score. Consistent, on-time payments are crucial.
Credit Utilization: The amount of revolving credit you have divided by the total amount of credit that is available to you. It’s recommended to keep your credit utilization below 30% to help boost your credit score. If you are spending more than 30% of your credit, it signals to lenders that you may be at risk to not be able to pay your balance back.
Length of Credit History: The period of time that your credit accounts have been established. The longer you've managed credit accounts responsibly, the better it reflects on your score.
Types of Credit Cards
Credit cards come with many different features. Understanding the different types of credit cards can help you choose one that aligns with your financial goals and spending habits:
Cash Back Cards: Cash back credit cards offer rewards on everyday spending on things like groceries, gas, dining, entertainment or other categories based on the financial institution. For every qualifying purchase, the cardholder will earn back a percentage of what they spend.
Travel Rewards Cards: Travel rewards cards allow for cardholders to earn rewards like miles or points for travel related expenses. There are two types of travel credit cards; general travel rewards cards and co-branded travel rewards cards that are joined by the credit card issuer and the merchant which is usually an airline or hotel.
Secured Credit Cards: Secured credit cards are different from unsecured credit cards because they require an initial security deposit to open the account. This type of card can help individuals who are building or rebuilding their credit.
Student Credit Cards: Student credit cards work similarly to other types of cards except they are tailored to college students without an established credit history. These offer similar perks as cash back credit cards but on purchases college students are likely to make.
Familiarizing yourself with these aspects of credit cards will help you make informed decisions, effectively manage your finances, and improve your overall financial well-being. Whether you're new to credit cards or looking to optimize your usage, knowledge is key to using credit cards responsibly and maximizing their benefits.
For more information on the credit cards we offer visit our website at msufcu.org/rates/credit_cards
Tags: Credit Cards, Tips and Tricks