Are you wondering how do credit cards work for beginners? Do you need to get a clear idea of exactly how to use a card before you begin to apply? Are you wondering what risks you need to know about before you commit to paying an annual fee? Read below to discover everything you need to know about applying with a credit card issuer.
American Express® Gold Card
Best for Travel
How Do Credit Cards Work for Beginners?
First of all, we need to look at what credit cards are and why you may need one. Let's look at the difference between credit and debit cards, to begin with.
What is the Difference Between a Credit Card and a Debit Card?
When you use a debit card to pay for a purchase, the money is immediately drawn from your bank account. When you run out of money, you either won't be able to use your card or will start using your overdraft.
A credit card will not charge you for your purchase immediately. Instead, you will be presented with a monthly credit card bill which will charge you for all of your purchases over the past 30 days at once.
This bill will include interest and fees associated with what is in effect a line of credit from your card issuer. However, you may find some providers will not charge you any interest at all - as long as you pay your bill on time and don't carry a balance into the next month's billing cycle.
How Do Credit Cards Work for Building Credit?
if you want to start building up a credit history and developing a credit rating score, owning a credit card is one of the most effective methods. This is especially important if you hope to take out a car loan or mortgage in the future.
Every time you use a credit card, you will be borrowing money from your bank which is to be repaid at a later date. If you make sure to keep track of your spending on your secured credit cards and repay what you owe during your monthly billing cycle - you will be able to build up your credit score.
Why is a Good Credit Score Important?
Your credit score is an indication to lenders of how trustworthy you are and how likely they are to get the money they have loaned back. The longer you have been using a credit card, and repaying on time - the more your credit rating will increase.
if you apply for a loan or mortgage, one of the most important checks that a lender will make is with the credit reporting companies (such as Experian). If you have a high credit score and a good credit history, you will be more likely to be accepted for a loan. A good credit score is also likely to mean you are offered more beneficial interest rates and credit limits by companies who deem you trustworthy.
What Do You Need to Know Before Applying for a Credit Card?
As well as discovering the answer to "how do credit cards work/", you will need to know what risks are involved in spending with a credit card. Plenty of people have run into trouble with unregulated spending on credit cards which has resulted in substantial debt and negative credit scoring. Here are the pitfalls to avoid.
You should make sure that you are not spending beyond your means and don't get a nasty surprise when your credit card bill arrives at the end of the month. You need to make sure you work within a realistic budget and don't allow impulse spending to pull you into any debt.
What Happens if you are Unable to Pay Your Credit Card Bills?
If you have overspent and are unable to settle your monthly bill within the required repayment period, the interest on your loaned money will increase. You are also likely to be facing a late fee and your credit score will also suffer.
For these reasons, it is very important that you plan your spending and only use your credit card for purchases you can comfortably repay at the end of the month.
If you can't repay your credit card bill in full, then you need to be aware that you are likely to be charged interest on the full amount owed, not just the remaining outstanding balance.
So, before you apply for a credit card and start spending, you must have a clear idea of your incomings and outgoings, as well as the interest rates that will apply if you are unable to pay your bills on time.
What are the Different Types of Credit Cards?
The easiest method of getting a credit card is to apply through the bank which you already have a debit account with. But this option may not give you access to the lowest annual fees, best interest rates, and great rewards programs.
If you are going to get the best out of a credit card, you need to take the time to do your research and make sure you are getting the largest amount of credit card rewards for your spending. Things to consider when deciding on your best card options include:
- Do you want a travel credit card or an airline credit card so you can start redeeming your miles?
- What kind of minimum payments do you need to make to unlock points and rewards?
- Which interest rates are available for you?
- How large are the late repayment fees?
- How much credit will they allow you?
It's not only banks that offer credit cards - you can also choose between credit card issues by online lenders, airlines, hotels, and even retail stores. Below we will run you through the different types of credit cards and the benefits of using each one.
What are Rewards Credit Cards?
A reward credit card is the most common kind of card and will reward you with points or miles each time you spend money with your card. These rewards points can be spent with partners in hotels, retails or even count towards your air miles.
What are Low-Interest Credit Cards?
Low-interest credit cards usually don't have much in the way of rewards points but will charge you low interest on the money you spend. Introductory rates on these cards can even be 0% for a specified period!
What are Student Credit Cards?
A student credit card has been designed specifically to meet the needs of college students who haven't had the time to build up a credit history or score yet. Because you have no history as of yet, you may need a parent or guardian to function as a co-signer for the card or be able to submit proof of consistent, independent income.
Summary: Understanding Credit Cards: A Comprehensive Guide
You should now have a clear idea of the answers to the question "How do credit cards work for beginners?" and the different types of credit cards which are available.
If you make sure that you do your research and are aware of the risks of late repayments, then applying for a credit card is the quickest and most effective way to start building up a healthy credit history.
Five Ways to Save For A Down Payment
Saving enough money to buy a house might seem difficult. However, with a sound savings strategy, anybody can save enough for a down payment on the home of their dreams.