Charge it! It’s a phrase you’ve committed to memory — and an action you take perhaps without thinking much about it. Credit cards are often easy to get, hard to manage, and even harder to pay off. But you need them to help establish a credit history, which is essential for doing things like renting an apartment, buying a car, or sometimes even landing a job. Understanding how credit cards work can make or break your financial future.
Alexa von Tobel, founder and CEO of LearnVest.com and the author of Financially Fearless, walks us through the basics of interest rates, late payments, credit scores, and everything else you need to know about how credit cards affect your life.
Should I have a credit card?
Generally speaking, yes. Building your credit history via a credit card can be an effective way to help your credit score. Think about it: Who are you more likely to trust — your best friend from elementary school or a stranger you just met on the street? Financial institutions generally view a long, positive credit history as a sign of trustworthiness and may reward you with lower interest rates as a result.
If credit cards are used wisely — you pay them off in full each month and never miss a bill — they can also be a tool to help you save. Depending on the type you have, there are lots of perks you may be able to take advantage of. For example, if you’re a traveler who loves to explore internationally, you can try a credit card that waves the foreign transaction fee — which is normally 2 to 3 percent.
How many cards should I have?
I believe a good benchmark is to have two cards from different credit card processors — for example, Visa and American Express — in case vendors do not accept all types. I often recommend keeping a backup card at home in a safe place in case your wallet is ever lost or stolen. The more cards you have, the more you will need to keep track of, so having just a few can help you simplify your overall credit card management.
What’s the best “starter” credit card, if that exists?
This depends on a number of factors including who you prefer to bank with and what your needs are. If you’re a student, consider checking with your bank to see if they offer a credit card specifically for students. If you have not yet started establishing a credit history, check out secured credit card options.
What is a secured credit card?
A secured credit card has been referred to as a “credit card on training wheels” because you have to deposit a set amount into a savings account as collateral for the amount you borrow, so it’s like using your own money. If you have a poor credit score, a secured credit score could be your best option to rebuild your credit. The downsides of secured credit card are that they tend to have annual fees, application fees, late-payment penalties, high interest rates, and over-the-limit charges. I only recommend getting a secured credit card if you have a poor credit history and need a vehicle to rebuild it. These typically require a deposit as a way of guaranteeing that you will be able to pay off your balance.
If I apply for a credit card, what are some reasons I’d be turned down? Is there anything I can do about that?
The biggest reason is that your credit history is either insufficient or poor. If you have little or no credit, ask your bank about the best starter card option. If you have a poor credit history, start to reverse the trend by making an effort to pay off your debt in full if you are able to. Also, check to make sure you have no outstanding medical bills or parking tickets, which are two of the biggest credit-score tankers outside of credit card debt.
Do I need a credit card to build good credit?
Not necessarily. There are a variety of ways that you can potentially prove to a lender that you are creditworthy: Pay your student loan monthly balance in full and on time, never miss payments on everyday bills, make a steady income, and open a checking account with the bank where you will apply for a credit card, loan, or mortgage.
Can you establish credit with a debit card?
No, but debit cards can help you establish a relationship with the bank where your account is. If you are in good standing and have been a bank’s client for some time, you may be more likely to be considered for a loan or credit card.
When I first open a card, what should my limit be? As I get older, how much should it increase to?
Your credit limit depends on a number of factors, but one of the most important ones is usually your credit history. Many providers have student credit card options designed specifically for students who have little to no credit. Generally, these cards will have a limit ranging from $300 to $1,000, depending on the card issuer. Once you have consistently proven to pay your bills on time, you can consider applying for a credit line increase.
How often should I look at my online account?
Every day! It’s important to check your credit card activity to make sure all transactions are accurate and to keep an eye out for any fraud. If you use a tool like LearnVest’s Money Center, you can link all of your accounts and take a look at everything at once. I recommend taking a daily “money minute” — time set aside everyday to get a snapshot of your money.
What happens if I don’t pay my bill? Is it a huge problem if I miss one payment?
I recommend that you always pay your bills on time (and in full, if possible). If you miss a payment, it will show up on your credit report and likely dock your credit score significantly. Your credit card provider might also increase your card’s interest rate. Bottom line: If possible, don’t miss a payment.
Can I use my credit card to get cash from the ATM? Should I?
While you can use your credit card to get cash from the ATM, this cash advance is really just taking a loan from your credit card issuer and this tends to come with a very steep price. Any money you take out as a cash advance is charged a higher interest rate than the rest of your credit card balance, plus an additional transaction fee. It’s typically much more affordable to get cash with your debit card, so you can help avoid fees and interest on the amount you withdraw.
Should I get a store credit card if they’re offering me a discount on my purchase?
I do not recommend store credit cards, as they tend to come with high interest rates and fees. Not to mention, they give you another card to track. Because you probably won’t use a store credit card frequently, you’re probably more likely to forget it exists — and forget to pay it off.
What does APR mean?
Annual percentage rate, or the interest rate you’ll be charged on your credit card debt each year. This number only matters if you are carrying month-to-month debt, which you should avoid. APR is the rate that determines the interest you incur monthly, and it can change before the end of the year. Watch out for an APR switch-up a couple of months after you have a credit card. Many credit card issuers will offer a 0 percent APR for the first couple of months of use, and then raise it after that initial term.
What is actually a good rate for a credit card? What is a bad one?
The average low interest credit card will have an APR between 6.99 and 9.99 percent. Typically, this APR is offered to customers with excellent credit and a strong credit history. The average variable APR rate — that is, one that changes rather than stays “fixed” at one rate — is just over 15 percent, so be wary of anything higher than average.
Is there such a thing as a card that has 0 percent APR and stays that way?
It’s not uncommon for credit cards to have a 0 percent introductory APR. Depending on the type of card and the provider, this intro amount can be available for up to 18 months. However, after the intro period is up, most credit cards will return to the regular APR — likely between 10 and 20 percent. Be careful to not carry a balance over month-to-month if possible, otherwise you may be charged interest on it once your introductory period runs out.
Are there other hidden fees (late fees, periodic interest rate adjustments, taxes) that I should know about?
If your payment is over 30 days late, you will likely be charged a late fee, in addition to a raise in interest rate. If you travel abroad, expect to get hit with a foreign transaction fee every time you use a credit card or debit card, unless you specifically have a card that waives it.
What’s a periodic interest rate?
Your daily periodic interest rate is your APR divided by 365 or 360, depending on your credit card provider. It’s important to remember that credit card debt accrues daily — not monthly — based on your periodic interest rate. What this means is that on day two of carrying a credit card balance, you will be charged interest on both the balance and the previous day’s interest. The daily periodic interest rate is important to know if you’re trying to calculate how interest on your debt adds up each day, and how much you can save by paying off your credit card debt immediately. If you always pay off your balance in full and don’t carry month-to-month debt, you won’t have to pay any interest on purchases, regardless of your APR or periodic interest rate.
Some cards charge an annual fee. Are the benefits worth it?
This depends on what you’re looking for. Generally, there are a lot of great no-fee cards out there, so you can certainly avoid paying an annual fee. However, if there are certain benefits you’re looking for, weigh the potential value against the cost. For example, maybe the $100 fee on a card with good travel benefits will be insignificant to you if they always waive the $25 checked bag fee. How many trips will you take to make that worthwhile?
What kinds of benefits should I look for in a credit card — miles, cash back, no fees, etc.?
This really depends on your lifestyle. If you love to travel or have to travel often for work, consider a credit card with miles. If you spend the bulk of your lifestyle budget on everyday purchases like groceries and gas, look out for cash-back benefits. Can’t decide on which you’d prefer? Some credit cards also offer a flat-rate cash back, giving you a certain percentage of cash back on all purchases, regardless of category.
Is it worth it to put everything on my credit card to earn the points, or does it look bad to have a huge balance even if I pay it off every month?
This depends on your credit utilization rate, which shows what percentage of your available credit you’re using. You should aim to use less than 30 percent of your utilization to help show that you’re a low-risk lender. So if your credit card has a limit of $3,000, aim to charge no more than $1,000 at any given time, even if you pay your bill in full each month. If you exceed 30 percent, it may ultimately ding your credit score — potentially a much more expensive move in the long run.
Is it a bad idea to use credit cards for small purchases like coffee? Should I be discerning about what I use my cards for?
Short answer: No. As long as you pay off your monthly balance in full and keep your credit utilization rate under 30 percent, using a credit card can be a smart way to spend. There are often lots of great cash-back rewards credit cards, which allow you to get a discount on everyday purchases, such as grocery bills and gas.
How do you actually check on and ultimately redeem your credit card points for rewards, miles, etc.?
More than 41 percent of reward cardholders fail to even cash in on their rewards — essentially leaving freebies on the table. To check on and redeem your rewards, log on to your credit card provider’s site and head to the landing page with your credit card’s balance. There will likely be additional information about your rewards and how you can redeem them. This is site-specific though, so if you’re still unclear how to redeem rewards after exploring the site, contact your credit card provider’s customer service department.
Is it easiest to call the company directly or do it online?
First, do it online. Most companies will have a live chat help feature, so even if you get stuck, you can talk to a customer service representative via instant messaging. If you’re still frustrated, call the company.
Is setting up auto payments on your credit card a bad idea? (It seems convenient, but is there a risk of fraudulent charges?)
If you want to make sure to never miss a payment, auto payments can definitely help. That said, it is still critical that you verify all the charges. This is especially important given recent large-scale security breaches at major retailers, but even your everyday transactions could be incorrectly charged. This is why I recommend checking on your money daily — not just when it comes time to pay your credit card bill.
How do I know if there are fraudulent charges? Will the credit card company notify me if something looks off?
Although your credit card issuer may contact you if there was either a recent security breach or if there are suspicious charges on your card, it is ultimately up to you to recognize if there are fraudulent charges. You’re probably much more likely to notice incorrect transactions — say, if a restaurant changed your tip from $5 to $50, causing your bill to increase without you knowing — if you check your money daily.
What do I do if there are fraudulent charges? How do I get them removed?
Contact your credit card company immediately to report the potential fraud. They will likely cancel the card and issue you a new one within a couple of days. Most credit card issuers will waive fraudulent charges, so long as they are reported within a specified period of time.
What should I do if my credit card is lost or stolen?
Immediately call your credit card issuer. Some companies will also allow you to report your card as lost or stolen online. They will typically cancel the card and waive any charges that occur after the card is reported. Under federal law, even if a credit card theft used your card prior to when it was reported, you will only be liable for up to $50 because the charges were unauthorized.
I use the iPhone app for my credit card and basically pay off whatever balance I have whenever I’m bored, so more than once a month. I imagine this is good because I never carry a balance, but can you make payments too frequently?
There’s no harm in paying your bill early, but I do recommend making payments on a schedule to ensure that you remember to pay off your balances in full each month. But if you have credit card debt, work on paying off that debt as quickly as possible, since interest compounds daily, not just when your monthly bill shows up.
Is it OK to just pay the minimum monthly payment?
I always recommend that whenever possible, you pay off your balances in full. Just paying the minimum means you’re racking up significant credit card debt, which is designed to snowball. I always joke that there are two things in life that are easy to gain but incredibly tough to lose — weight and credit card debt. If you’ve been carrying a month-to-month balance, don’t feel bad: A whopping 39 percent of Americans carry credit card debt month-to-month. That said, start taking action now, and pay down that debt as quickly as you can afford to.
Does asking to extend my credit limit hurt my credit score?
Although a credit limit extension may temporarily put a small dent in your credit score, in the long run, increasing your credit limit will likely improve your credit score. Nearly one-third of your credit score is based on your credit utilization rate, and if that rate drops, your credit score should increase.
Why did the credit card company set my limit? How can I change that?
Credit card issuers set your limit based on your credit score, past loan repayment history, income, and debt levels. If you had little or no credit, it’s likely that your credit limit will be low. Once you develop a strong credit history, you can ask to extend your credit limit.
What if the credit card company increases my limit but I’m worried about spending too much? Can I ask them to decrease it? Is it a good idea?
Generally, it’s not a good idea to decrease your limit because it can increase your credit utilization rate. If you are worried you will spend too much, set a specific budget for yourself for each spending category.
If my identity gets stolen, what steps should I take? How does this affect my credit?
First, contact every financial institution that you have a relationship with, including the major credit reporting companies. This will put a fraud alert on both your accounts and your credit report. Next, order your credit reports from all three reporting companies to check for errors (you can do so at AnnualCreditReport.com). Because you placed a fraud alert, you are legally entitled to a free credit report from each bureau. Lastly, create an identity theft report and submit it to the Federal Trade Commission. Make sure to keep thorough records of all of your communication and reporting.
Does checking your credit rating repeatedly hurt your credit? How often should I be checking my credit rating, and how do I do that?
No, this is one of the biggest myths surrounding credit scores. It can hurt your credit score if there are “hard inquiries” — external inquires into your credit score, since it may look like you’re desperate for credit. But you can personally check your score as much as you’d like at sites like CreditKarma.com. We also recommend checking your credit report annually. You’re entitled to one free credit report every year from each of the three major credit bureaus, so aim to check your credit report once every four months by going to a site such as AnnualCreditReport.com. Since this is easy to forget, set calendar alerts to remember.
What are the consequences of having a credit rating that isn’t excellent? For example, how good does my credit rating need to be if I want to rent an apartment? If I want to buy a car? A house? Take out an educational loan?
While there is no standard credit score minimum to qualify for a loan or credit card, having a poor credit score can have brutal long-term costs. Because credit scores can influence interest rates, extra interest will cost you as you take on numerous credit cards, car loans, and mortgages over the course of your lifetime.
Is it a good idea or bad idea to have a joint account, like with my spouse or my parents?
This is up to you and your situation. If you have a joint credit card account, both you and the other party are equally liable to repay the debt. Your credit histories will also be affected in the same way. As a rule of thumb, you should only apply for a joint credit card account if both you and the other party are reliable lenders. If you haven’t built credit but your parents have a great credit history, consider becoming an authorized user. You will be able to start establishing credit without the responsibility of debt.