Are you looking forward to getting your first credit card or adding to what you already have? If so, you have come to the right place. To avoid financial difficulties and accumulation of debts, there are a few things you should know before getting a credit card.
Credit card debts differ from other types of debt due to high and compounding interest. This makes it easy to accumulate credit card debts and easily wreck your credit score without even knowing it. Whether you are a new credit card user or an experienced one, you should be prepared before you submit a credit card application.
If you are getting started, consider becoming an authorized user of a credit card account. This way you can build experience and later on apply for your own account. In this article, we will walk you through the most important things you need to know about credit cards.
Without further ado, let’s get started.
1. Credit cards come with interest known as APR
Most if not all credit cards come with an annual percentage rate (APR). The APR is expressed as a yearly percentage of the unpaid loan or credit balance.
Before you get your first or more extra credit card(s), be aware of this interest rate. APRs vary from one company to another and the type of credit cards a user is getting.
A high APR can put you in more debt if you are not careful.
2. Millions of people are stuck with credit card debts
Before getting a credit card, you must know that credit card debts are real and many people are struggling with them. According to CNBC, 47% of Americans have credit card debts.
Credit cards are very tempting and very easy to accumulate a lot of debts on them. Most people don’t know how credit cards work which makes the matter much worse.
It is always hard to bring your credit card debts down once you have accumulated a lot of them. This is because the unpaid interest will be compounded every payment period. That is you will pay interest on the main balance and unpaid interest. As a result, your debt will grow exponentially.
3. Each credit card has a limited amount you can spend
Yes, there is a limit to how much your lender allows you to spend on your credit card(s). This amount is known as a credit limit, line of credit, or personal line of credit.
For example, if your credit card has a $2,000 credit limit, it means you can spend up to $2,000. Once you spend all of it, you cannot use it anymore until you pay some of it back. Keep in mind that some credit cards can let you spend more than your credit limit. This is dangerous and you should not try it.
Since your credit card loan resets as you use it and pay it off, credit card debts are considered revolving debts.
If you use your credit wisely, your lender will increase your limit automatically. You will probably get a notification about the limit increase via email, phone, or another mode of notification you set up in your account. If not, you can learn about it from your online account.
You can also request a credit increase. Your lender will evaluate your request and approve it or deny it depending on how you used your previous limit. If you have not gained your lender’s trust, your application will most likely be denied.
4. Before getting a credit card know that too many credit cards can lead to a disaster
Having too many credit cards is not always the best idea. Although it helps in increasing the number of opened accounts which in turn adds value to your credit history; too many credit cards can lead to more debt.
Your credit limit will increase as you get more credit cards. A credit limit is the amount each credit card provider allows you to spend on each credit card. After using the card for a while, you can request a credit line increase. Credit card companies also increase this limit for borrowers who have gained their trust.
A large credit limit means that you have a lot of money you can spend at your disposal. Without discipline, you could end up spending all of it on things that cannot bring you profit. Hence, putting you in huge debt that comes with a large interest rate.
Keep in mind that credit card APRs are the highest in the industry and they are compounded. So, many credit cards will put you in more debt that will grow exponentially due to compounding interest.
5. You can withdraw cash from a credit card
Some credit cards have limited debit card-like services. You can withdraw money from a credit card which is a service similar to a debit card. However, the amount you can withdraw is limited as lenders do not want you to increase your credit utilization very fast.
This service is known as a cash advance. Keep in mind that you pay a hefty price for this service. Most lenders charge $5 or 10% based on what is higher. Besides, you must pay other related fees associated with the transaction. For example, if you are getting cash from an ATM, you should expect an ATM transaction fee.
Most people get the cash from grocery stores without a fee.
I would personally advise you to never withdraw cash from your credit card. It is a risky move and can cost you a lot of money right away.
>>MORE: Can You Withdraw Money From A Credit Card?
6. You can build a credit history with credit cards
Credit history shows all debts you have taken in the past and how you paid them off. That is it includes the amount you borrowed, your lenders, how each one was paid, late payments, bankruptcies, foreclosures, etc. Your credit history can also include other activities you conducted with other businesses such as rental or utilities payment history.
Every financial decision you make with your credit cards is recorded and sent to credit reporting companies (Equifax, Experian, and TransUnion). These companies put all that information together and compile your credit report which is then used to calculate your credit score.
Having credit cards is like taking out small loans. Your credit card activities will form your credit history. The longer your credit history the better. Lenders use your credit history to evaluate your creditworthiness. That is it helps them to see how risky it is to lend you money. The idea is that you are more likely to pay off debt now if you have done it successfully in the past.
>> Related: Credit Report Overview
7. Each credit card will affect your credit score and credit history
Every activity on each credit card will be used to calculate your credit report and credit score. You should treat each credit card with care and not violate their terms of service.
Always remember that every activity on each card is recorded and used to categorize you financially. The more responsibly you use your cards, the better your category.
That is you will be a great borrower if you use debt wisely. However, if you don’t take care of your debt wisely, you will end up in the category of risky borrowers.
It is very difficult to secure a loan approval once you have become a risky borrower. Even if you get approved, you will pay the highest interest on the loan or mortgage.
8. You can have discounts on certain purchases
Due to competition among lenders, credit cards usually come with discounts on certain purchases. The most common discounts are:
- Cash backs: Given on gas, shopping, groceries, etc. These discounts are sometimes given when you shop at particular stores such as Amazon, Target, etc.
- Mile points: Provided on flights and travel-related services
New customers also get sign-up bonuses and referral bonuses. Some credit card companies give more than $200 in sign-up bonuses.
Cashback can be used to buy other products or pay off some of the balance you owe the lender. These discounts vary from one lender to another.
9. You can swap a credit card with a high APR for one with a low APR
It is possible to replace a high-APR credit card with one that has a lower APR. This is similar to the mortgage refinancing process.
If you are falling behind on your payments due to a high APR, replace this card with a much cheap one. That is another lender will assume responsibility for your debt and pay your current lender. This process is known as a balance transfer.
After the balance transfer, your account will go under the new lender. If you are lucky, you will end up with a low APR which will give you a chance to pay off your debt much faster.
Keep in mind that you will pay a fee for this process and it varies from one lender to another.
