Top Consumer Choice
Top Consumer Choice
Credit cards can invoke surprisingly strong emotions: fear, distrust, disgust, excitement, intrigue, and relief can all get tied to a small piece of plastic. Often, your familiar or personal history with debt can have a large impact on how you feel about credit cards.
People have such a wide range of emotions, in part, because credit cards can help or hurt you in many ways. Often, cards have relatively high interest rates, which can make it difficult to pay off credit card debt. However, you can also use them to earn rewards, receive purchase protections, and pay over time without paying interest.
A credit card is a revolving line of credit that allows you to easily borrow money using your card.
Your balance (how much you owe) increases as you use your credit card, and it goes down when you make a payment. What makes a revolving account different from an installment loan or non-revolving credit line is that you can borrow against your line of credit multiple times without having to apply for a new account.
For example, you may have a credit card with a $1,000 credit limit—the highest your balance can go before your card will be declined for new transactions. If you make a $300 purchase, you’ll have a $300 balance and $700 in available credit.
Credit card billing cycles can be confusing for new and experienced cardholders alike. Also referred to as billing periods or statement periods, your billing cycle will often be about 30 days long.
All the transactions that occur during the billing cycle are added together to determine your bill for that period. Purchases, balance transfers, cash advances, fees, and interest can increase the balance, while payments, refunds, and credits can decrease the balance.
On the last day of your billing cycle — the statement closing date — a bill is created based on the balance. Generally, a payment will be due after a 21-to 25-day grace period. However, your next billing cycle starts right away, which is what often confuses cardholders.
For example, say you make a $300 purchase on the first day of your billing cycle (and don’t use the card for anything else). Your statement closes 30 days later, and your card has a 23-day grace period before your bill is due. In total, you get 53 days between when you made a purchase and when you have to pay the bill.
If you use your card to make a $100 purchase a week after the statement closing date, your card account’s total balance increases to $400. However, your current statement will still reflect the $300 (it’s a snapshot that doesn’t change after the bill is created). The additional $100 is part of a new billing cycle and is part of the bill that’s due 23 days after the current billing cycle ends.
Credit cards often have a high interest rate, which is the same as the card’s annual percentage rate (APR). The APR doesn’t account for fees that you may have to pay to open, keep, or use your card.
Here’s a quick overview of how and when you may have to pay interest:
One important concept to understand is that credit cards may have different interest rates for cash advances (when you withdraw cash from an ATM or at a merchant), balance transfers (transferring debts from other cards or into a bank account), and purchases. Your cash advance and balance transfer transactions may begin to accrue interest immediately, even if you’ve previously paid your bill in full.
Some people run into trouble with credit card debt because they see their credit limit as how much they can spend. However, after “maxing out” their card and hitting the credit limit, they aren’t able to pay the bill in full and start accruing daily interest. Left unchecked, overspending on credit cards can lead to thousands of dollars in high-interest debt.
Ideally, you can use a credit card like a debit card — only making purchases you can afford to pay for when the bill arrives. And there are different reasons you may want to have and use credit cards:
For those who are able to use a credit card to receive the benefits and then pay the bill in full to avoid interest, these benefits can make credit cards rewarding and exciting. Some people even get multiple cards and “hack” the systems — carefully planning their purchases and redemptions to maximize their rewards.
While all credit cards tend to work the same way, cards are often put into different categories based on their primary function or feature. Common categories include the folowing:
There’s often overlap between the categories as well. For example, you may find a co-branded rewards card that also has a no-interest offer. Or a secured card that offers rewards.
In addition to a card’s benefits and interest rate, you may want to review the fees you’ll have to pay to open and use a card.
All of these fees can be avoided, either by choosing a card that doesn’t have the fee or avoiding fee-incurring actions.
There are four major credit card networks (the behind-the-scenes systems that make everything work) in the United States — American Express, Discover, Mastercard, and Visa.
American Express and Discover are both operator credit card networks and issue credit cards. In contrast, Mastercard and Visa operate networks, but credit cards are issued by banks and credit unions, such as Bank of America, Chase, Citi, PenFed, and Wells Fargo.
Credit card issuers can make money in several ways:
Interest payments tend to be the largest source of revenue for credit card issuers, followed by the interchange fees that merchants pay.
Opening a credit card may help your credit in the long run if you make your payments on time and don’t carry a large balance. However, you may see your scores drop a little when you first apply for and open a new account. Additionally, missing a payment and using a large portion of your available credit limit can hurt your credit scores.
Having multiple credit cards isn’t necessarily bad. However, you don’t want to have so many cards that you’re struggling to manage them all and accidentally miss payments. Additionally, opening multiple cards may be a bad idea if you tend to make purchases that you can’t pay off right away and end up paying interest.
There’s no overall best rewards card because cardholders have different goals. If you want simplicity, a flat-rate rewards card that doesn’t have an annual fee and offers 2 percent cash back on all purchases could be a great option. Travel rewards cards can offer points or miles that will be worth more, but you’ll want to dedicate some time to understanding the rewards program and learning how to maximize your rewards.
Most credit cards have an interest rate range, and the rate you receive will depend on your creditworthiness. Average interest rates tend to be around 15 to 17 percent, but even if you have an APR that’s below the average, it could still be higher than other financing options.
No, there are many cards that don’t charge an annual fee, including some secured cards. Annual fees are more common on premium rewards and travel cards, but the cards may offer money-saving benefits that could be worth more than the fee. If you have a card with an annual fee and your year is coming up, you can close your account or ask the card issuer if you can change to a no-fee card to avoid paying the fee.
Most credit card fees are avoidable. There are cards that don’t have annual fees, foreign transactions fees, or balance transfer fees. Some cards will also waive an initial late payment fee, or may temporarily waive balance transfer fees. Also, if you’re charged a late payment fee, you may be able to contact the issuer and ask for a refund or a statement credit to offset the fee and potential accrual of interest. Card issuers don’t need to grant these, but they may be willing to if you rarely miss payments and bring the account current before calling.