If you’re reading this, you’ve probably already opened a bank account already. Well, a credit card is a little different from the prepaid card or debit card your bank might have given you. It resembles the usual debit card in appearance, only that it lets you access credit or money that you do not already own. In other words, it allows you to borrow money to make purchases, pay your bills, or access certain services. Some credit cards will actually allow you to withdraw cash from an ATM, which is known as a cash advance. However, cash advance often attracts high interest, especially if you don’t keep up with the billing cycle. Owning a credit card can also provide you with several benefits, including the following:
- Increasing your purchasing power
- A credit building opportunity
- Mile points, cashback, and other rewards
- Protecting your bank account from financial fraud
- No extra charges on foreign transactions
- Certain privileges in hotels, airlines, and supermarkets
Despite the numerous benefits, however, owning a credit card is a huge responsibility. This is because it offers you borrowed money, which should be paid back. It affects your financial health in various ways, as you will discover below. To shed some light on this, here is a newbie’s guide to credit cards.
They Affect Your Credit Score/Report
As far as borrowing is concerned, nothing is more important than your credit report. The report shows all your credit history, including any accounts you’ve held, loans you’ve taken, debts you’ve paid off, and so forth. This information is used to calculate and determine your credit score. As seen on this website, your credit score is used by lending institutions when gauging your ability to pay back borrowed money. They also use this information when assigning a credit limit. One thing to note is that like any other loan, having or lacking a credit card affects your credit score. This is because when you take one, the information goes into your credit report. Lenders are also required to report any credit card payments or transactions you make to the credit bureaus.
Unlike when you don’t have one, having a good payment history on a credit card account that you’ve held for a while can boost your credit score. On the flip-side, poor repayment history and redundancies on your credit card account can negatively impact your credit score.
How They Work
These days, getting a credit card is pretty easy. You just have to approach a lending institution, make the application, and wait for approval, which takes just a few days. Once approved, you’re issued with the card along with a secret PIN. With this, you can make purchases and payments online, at the malls, or any merchant that accepts credit cards. For most credit cards, you’ll get a card statement every month, quarterly, or annually depending on your arrangement with the provider. The billing cycle is usually monthly. The bill tells you the amount you’re supposed to pay, and payments can be interest-free if done within the grace period. Many credit cards also allow you to make a “minimum payment” and the balance is carried forward to the next billing cycle at a fee. As earlier mentioned, cash advances come at an extra cost upfront, usually between 4 and 10 percent.
Smart Credit Card Tips
As you might already know, a credit card can easily ruin your credit if not properly managed and used with discipline. This is something you should know before getting your first credit card. It can easily make you overspend and even find yourself drowning in a pool of debt. To get the most out of your credit card and avoid financial ruin, here are some helpful tips.
- Shop for your credit card wisely before applying
- Use your credit card only when necessary
- Have cash on you as much as you can
- Avoid cash advance
- Check your bank statement and ay your balance on time to avoid late-payment fees
- Try to pay the entire balance to minimize interest
- Avoid applying for multiple credit cards – this could negatively affect your credit score
- Think about insurance for identity protection
- Keep old credit card accounts for longer; it positively impacts your credit score
Finally, there are so many credit card options on the market, and the “perfect” card is hard to come by. This makes it important to shop wisely before deciding on which one to apply for. Consider your financial situation and your spending habits, as well as the credit card type, features, fees, rewards, terms, and conditions attached to the card. All in all, a credit card is supposed to cushion you from the inconveniences and increase your financial security.