The Beginner’s Guide to Credit Cards

Credit cards! Can’t live with them, can’t live without them. According to the latest report by the Federal Reserve, there’s a whopping $790 billion in credit card debt in the U.S. On the flip side, though, opening credit cards and managing them responsibly is crucial to establishing your credit history, which impacts your eligibility and rates for large, low-interest loans.

Here’s all you need to know about credit cards.

How credit cards work

When you use a credit card to pay for a purchase, you’re borrowing money from the financial institution that issues the credit card. You’ll repay the loan, in part or in full, at the end of the month when the bill is due. The credit card company charges interest, or a percentage of your balance, which you’ll pay if you don’t pay off your bill by its due date. This number is determined by your annual percentage rate (APR), which refers to the annual cost of borrowing money with your credit card. The longer you carry a balance, the more the amount interest will accrue.

Now, let’s take a deeper look at each step in responsible credit card management.

Applying for a credit card

First, you’ll need to apply for a credit card. If this is your first card, you’re probably best off applying for a secured credit card. These starter cards require you to make a deposit before you can open the line of credit that establishes the loan that’s attached to the card. The deposit will serve as a form of collateral in case of a missed payment or default. Usually, secured credit cards will only offer a modest line of credit. If you make your payments on time, you’ll get the deposit back after a predetermined amount of time, usually eight to 12 months, at which point you can close the account and open an unsecured credit card (which does not require the deposit to serve as collateral).

As you consider your credit card options, look no further than your local credit union. As member-owned cooperatives, credit unions consistently offer credit cards with lower interest rates than credit cards issued by big banks, with the most recent data showing the average credit union credit card offering interest rates at 11.22%APR compared to the average bank’s credit card offering interest rates at 12.41%APR. [T & I Credit Union offers credit cards with interest rates as low as 10.90%APR*]. You can also expect more personalized member service when working with a credit union.

It’s important to note that many credit unions include clauses in their credit card terms allowing them to withdraw funds from the cardholder’s checking or savings account if the cardholder defaults on the credit card payments. When applying for a credit card through a credit union, look for this disclosure in the terms so you are aware of this arrangement if it’s in place.

Using your card

You can use your card to pay for a purchase at any vendor that accepts your card brand (such as Mastercard or Visa). You can charge up to the available credit line that’s associated with your card. However, to keep your credit score high, it’s best to keep your credit utilization below 30% of the available credit. So, for example, if you have a $1,000 limit, you would want to keep your balance at or below $300.

Statements

You’ll receive a credit card statement from your credit card issuer each month. The statement will include the following information:

  • Summary of all transactions made on the card since the last billing cycle. This includes all purchases, payments, balance transfers, cash advances, fees, interest payments and more.
  • The balance from the previous billing cycle.
  • The minimum payment due.
  • The payment due date.
  • The number of days in your billing period.
  • Your credit limit and available credit.
  • Any available or redeemed awards.

It’s important to review your statement for accuracy. Also, take note of the bill’s due date so you don’t miss a payment.

Payments

Once you’ve received your statement, you can choose how much to pay. If you pay your entire bill in full by its due date, you’ll avoid paying interest on the charges you made this past month and only pay the cost of the actual purchases. On the other hand, if you only make the minimum payment, interest will continue to accrue on the balance you still carry on the card. If you can’t pay the full balance, you can also choose to pay an amount that falls between the minimum payment and the outstanding balance.

[You might also want to consider automatic payment with us if your card is issued by T & I Credit Union to ensure you are never late on your payments.]

Building and maintaining a high credit score

Follow these tips to build your credit score and keep it high:

  • Pay your bills on time.
  • Pay more than just the minimum payment due.
  • Keep your credit utilization low; ideally, at less than 30% of your available credit.
  • Ask for a credit limit increase after nine months of responsible credit card use.
  • Keep your cards active.

Responsible credit card usage is an important part of financial health. Follow the tips outlined above to keep your score high and enjoy the benefits for years to come.

[* APR=Annual Percentage Rate and is current as of [11/01/2021].]

Your Turn:

Have you recently opened your first credit card? Tell us about it in the comments.

About Kyle Trondle

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