Do you know in the U.S. the average credit card consumer owns at least 3 types of credit cards in their lifetime? It’s true. Based on the data released by the American Bankers Association in November 2019 the number of credit card accounts opened amounted to 374 million. According to the year-to-year origination that’s an increase of 2.5 percent compared to previous years. That’s a lot of plastic, so how much are they worth? Collective credit limits issued to new cards in April of 2019 amounted to $34.6 billion!
A survey conducted to look at the number of consumers who shopped for a credit card over the past year concluded the highest percentage consisted of millennial’s. Individuals in this generation made up 44% of the consumers who sought to open a credit card account with Generation X coming second at 32%. It is estimated that 1 in 4 millennial’s will plan to open a new line of credit in the next year; however, most young Americans who open their first credit card account are waiting longer to do so. This is most likely in part due to student loans.
How Credit Cards Work
At some point in your lifetime you are likely going to open a credit card account. You may have this preconceived idea that credit cards are bad; however, there are many different types of credit cards today to help you manage your money. Having a credit card is essentially an open-end loan to cover expenses with some added perks such as cash advances. They are highly favored by consumers as a method of payment for a number of reasons, especially for online shopping.
When you open up a charge account for a credit card it is typically issued to the consumer through a bank or some type of financial institution. Department stores and retail stores can also provide credit cards which you can apply for. Each time you use the card you’re essentially borrowing money from the institution it was issued from. Borrow is the key term to remember here! The money used to pay for purchases or services with a credit card does have to be paid back to the issuer. You will have the option to pay that amount in full or through monthly payments with a set minimum determined by the issuer. This is where it can get hairy.
Credit cards offer many perks but before you set out on a shopping spree there are some important things you need to understand. The amount you’re permitted to borrow from the issuer is your line of credit, which might be limited if you’re a first time cardholder. Simply put, you can’t charge $1,000 of merchandise on a card with a credit limit of $500. The issuer will determine your line of credit based on several factors when you submit an application. Different types of credit cards also have varying factors that will affect your credit limit so choosing the right one is very important.
Paying back the amount borrowed is another aspect to be mindful of when using your card. Your card issuer will have a due date that the account has to be paid by. If you don’t have the funds to pay back the full amount on your account you can make regular payments until the balance is paid off. You will have a minimum amount required that is typically a percentage of the balance. If you do not make that minimum payment by the due date you could be subjected to a late fee and additional penalties.
Understanding Interest Rates
Credit card companies are in the business of making money and they achieve this through interest rates in addition to annual fees and miscellaneous charges. Interest rates are referred to as Annual Percentage Rates or APR. The percentage rate is determined by the bank or financial institution. The way APR is calculated on your credit card statement is expressed in annual terms. The percentage rate is divided by the number of days in a year (365) to calculate the daily rate. The daily rate is multiplied by the balance on your statement at the end of each billing cycle which amounts to your interest charge for that month.
Let’s say you’re approved for a credit card with an APR of 19%. Divide this rate by the number of days in a year to calculate your daily periodic rate (19/365= 0.052). Your interest at the end of the billing cycle will be the DPR multiplied by the number of days in that month so 0.052 multiplied by 31 (days) gives you a rate of 1.61%. This is the rate for the current month which will be applied to the balance due. If you had an outstanding balance of $500 at the end of the billing cycle this is what your interest charge will look like calculated: 0.0161 x 500 = $8.05 in interest charges for that current month.
The average APR ranges between 13% – 23%. Some credit card companies have pretty steep interest rates much higher than this. The rate for cash advances is typically much more than the regular APR so be mindful of this in the terms of your credit card statement. Before you apply you want to look around for the best card options that offer lower interest rates outlined by the issuer.
First time card holders and many retailers do offer a 0% intro APR for a specified amount of time. Zero intro APR promotions will vary depending on the issuer but may range from 6 months to 18-months or even longer. This allows you to pay off your credit with minimal extra costs to you from the bank. Once the promotional period ends you are subject to the rates determined by the issuer on the remaining balance.
Pay close attention for credit cards that offer deferred interest. This is NOT the same as 0% intro APR. Credit cards that offer deferred interest may advertise it as ‘same as cash’ or 12-months interest free. With deferred interest you are not charged the interest rate for the duration of the promotional period. Afterwards, the interest rate starts adding up. This is where you can be seriously burned if you aren’t disciplined in your payments. If you fail to pay off the balance on time as outlined in the conditions you could end up paying the full interest amount on the original purchase. If it’s a high-interest rate card upwards of 20% this could be a substantial sum to pay.
Who Can Apply for a Credit Card?
There are many factors that will determine your approval when you apply for a credit card. This is known as the underwriting process. The credit card issuer’s bottom line is to evaluate applicants for the purpose of maximizing profit and keeping their risks at a minimum. They want to issue credit cards for consumers that will translate into profitable customers for them. What they don’t want is to lose money by issuing credit cards to consumers that may not make their payments.
The underwriting qualifications give the issuer an idea of who to approve for a credit card. Have you established a credit history? Do you have a job? Are you able to meet financial obligations on a month to month basis? These are the things credit card companies want to know before they approve a card to just anyone. The data used in the underlying process may vary by institution and the type of credit card you’re applying for but the three most important considerations are your credit history, income, and data from the credit bureau. This data provides the issuer valuable information they need to determine whether you’re a benefit to them or a risk.
Why Get a Credit Card?
While credit cards do allow flexibility to pay for a high-ticket item you may not have the funds for upfront, this isn’t the only reason consumers seek to obtain one. Obtaining a credit card and using it responsibly can offer several benefits.
Building A Credit History
An easy way to build your credit history early on in life is by obtaining a credit card. Why is this important? Well, for starters if you ever plan on buying a home, renting an apartment or applying for a loan your credit health is something that is often checked. Lenders will look at this info to calculate what kind of offers they can provide you. When applying for a job or for an apartment a credit check may be run to determine whether you’re a qualified candidate. Otherwise it might be difficult to obtain these without having solid evidence that shows you’re financially responsible.
Rewards and Perks
Another benefit of having a credit card is earning rewards when you use them. Who doesn’t love getting rewarded to shop? Certain types of credit cards offer cool incentives such as cash back or points from your purchases. Once you’ve accrued enough to redeem you can cash in those rewards as a statement credit or use your points to redeem offers such as gift cards or deals on flights.
Consider what you would most likely use your card on and choose a card that offers rewards and perks specifically for those things. For instance, if you plan on doing a lot of traveling look for a card that offers perks such as cash back on gas purchases or flights. If you enjoy dining out you might want to opt for a card with incentives for using at popular restaurants.
Most credit cards today come with fraud protection and offer greater security than a debit card. Thanks to the Fair Credit Billing Act credit card owners are protected against charges by an unauthorized user. If something happens to your credit card and you report it as lost or stolen right away, you are not liable for unauthorized purchases made after it has been reported. Likewise, your credit card issuer can put a stop on the card to prevent any purchases or unauthorized use when you report it lost or stolen. With debit cards you don’t have this same level of protection.
Flexible Spending Arrangements
Have you ever found yourself in a predicament where an unexpected expense arises that you don’t have the cash available for? Maybe there is something important you need right now but payday is a little too far off. A credit card can provide the flexibility of covering your payment in one of two ways. Aside from using the card as payment, another option depending on the type of card you apply for is a cash advance. Many traditional credit cards offer this option that allows the holder to borrow cash from their account. You will be issued a pin number to use with your card to allow for cash withdrawals much like a debit card. Some financial institutions may issue cash advance checks when you open an account which you can cash like a regular check.
Types of Credit Cards
There are various types of credit cards for different purposes. It’s important to have a good understanding of each of these to help you choose the right one for your needs. The key to getting the most from a credit card is to use it responsibly and establish a good credit history. The better your credit score is the better your rewards will be. If it’s your first credit card account you will have limited or no credit to begin with and will take time before you start seeing many perks. We’ve broken down the various types and who they’re best suited for to help narrow down your choices.
Your First Credit Card
When you’re ready to apply for your first credit card your options are likely going to be limited. The truth is without much credit history for lenders to go by you may have difficulty getting approved for a traditional credit card. Since you need to build up your credit to establish a history there are specific types of cards that allow you to do this.
A secured card is one in which you must open up with a deposit first. The amount required to open an account varies by institution though it’s typically a few hundred dollars. This type of card works similarly to a standard credit card in how it’s used. You have a credit limit you’re allowed to borrow for purchases. The credit limit is typically the amount you open the account with or it may be a percentage based on your deposit. This is due to the fact that your deposit also serves as collateral in the event you miss a payment or go over your credit limit.
Some issuers will save this deposit into an interest-earning account with your secured card allowing you to earn on it. This would be the ideal option to open a secured card if available to you. When you are able to make the transition to an unsecured card or decide to close the account, you receive this deposit back given your account is in good standing. In addition to putting a deposit down, some institutions will have additional conditions you need to meet before approval such as a bank account.
You don’t need to have a credit history built up to open an account. Secured credit cards report your data to the credit bureaus which will help build your credit score. Some issuers may transition your account to an unsecured credit card for you once you’ve established creditworthiness by making payments on time.
Establishing a credit history does come at a cost. In addition to the startup cost with your deposit you may also have an annual fee so look for options that don’t charge annual fees. With little or no credit history you are counted as a high-risk to credit card issuers until you can build up your credit. You may be subject to higher interest than an unsecured card.
These types of cards are issued specifically to college students between the ages of 18-21. If you are under 21 years of age you will need to be able to provide proof of independent income or have a co-signer on the account. Student credit cards are available as secured cards, requiring an initial deposit, as well as unsecured credit cards. Banks tend to look favorably on students as potential revenue for them in the future so you’re likely to find better deals. Look for student card issuers that don’t charge an annual fee. You may be able to find decent student credit cards that offer additional rewards and perks.
Here are a few things to consider if you will be studying abroad:
- Look for a card that won’t charge fees on foreign transactions for your purchases overseas.
- Cards that belong to a network with worldwide acceptance are favorable for traveling such as Visa and Mastercard.
**TIP – When looking to apply for your first credit card, opt for cards through issuers that offer opportunities for upgrades to obtain a better credit card later on. Some secured card options will do this for you once a good history has been established while others you have to ask.
Some student credit cards offer more attractive options like lower interest rates and rewards for students with good grades. A secured student credit card additionally allows you to set a spending limit to keep your debt minimal while learning how to manage your credit.
Store Credit Cards
Store credit cards are issued by retailers or through a bank that partners with the retailer. These can offer better rewards than some standard credit cards by earning points for purchases or services through the retailer. Some stores also offer cash back rewards based on a set percentage on purchases. Store credit cards that are issued through the retailer can only be used at that particular retailer. They generally have lower credit limits but can be a great way to establish a credit history with lower costs. Many popular retailers provide store cards giving you a multitude of options from mass retail chains like Walmart and Target to online retailers like Amazon. Other types of stores that typically offer credit cards affiliated just through them include:
- Department stores
- Clothing stores
- Home improvement stores
- Office supply stores
Some store cards, known as open-loop cards, are sponsored by the retailer and are issued through a major credit network. These types of credit cards might be harder to apply for if you don’t have good to excellent credit as they fall within similar requirements as standard credit cards. Store cards that offer deferred interest can help consumers save money in APR charges on purchases when paid in full by the promotional period.
If you’re looking for an option that gives you back more for your shopping habits then a rewards card is the way to go. These can be used to rack up rewards on certain purchases. For instance, gas rewards cards can be a great benefit for those who have a long daily commute or drive frequently.
Travel Rewards Cards
These types of cards can offer great rewards if you travel frequently and can help you save money on your purchases. Travel rewards cards generally offer programs where points or miles can be accrued from your purchases to use towards flights or hotel stays.
Cash Back Rewards Cards
These are traditional credit cards that allow you to earn points on most purchases. You can redeem these points once you reach the minimum towards your statement balance or choose between cash back or gift card. Some cards have promotional periods where you can earn more points on certain types of purchases.
Balance Transfer Cards
If you’re carrying a debt with a high-interest credit card it might be worth looking into a balance transfer card. These are designed to allow the transfer of a credit card balance over as a way of saving money on steep interest charges. Balance transfer cards generally have a 0% intro APR for a set period of time to allow you to pay your balance off without paying more in interest fees. Some cards will charge a balance transfer fee of 3-5% or a flat rate depending on which rate is higher. Be mindful of this when applying and make a plan to pay off the balance before the 0% APR period ends. If your balance is pretty high opt for a card that has the longest 0% intro APR period.
These cards are generally better suited for those with good credit standing. Unlike standard credit cards where you can make regular payments and carry a balance, with a charge card the amount due must be paid in full by the due date. These types of credit cards aren’t as common because they offer very little incentive or flexibility. If the balance isn’t paid in full by the due date you’re subject to late fees and other possible restrictions on the card as determined by the issuer. This can also have a negative impact on your credit score.
Small Business Credit Card
For owners with small businesses their financial needs will be unique from general consumers. There are specific credit cards for small businesses that come with unique features to help better manage business finances. A small business credit card generally offers higher credit limits than the average consumer. These types of credit cards are only available to individuals who own a business or head of a business. In addition to providing a personal social security number, requirements include a Tax ID or Employer ID number to open a business card account. This is to provide confirmation that the account owner will be held liable for the debt on the business credit card.
Low Interest Credit Cards
Interest rates will vary based on your creditworthiness but credit card issuers typically outline the range they charge in their offers. Making payments on time is critical to build and maintain good credit and keep interest rates down in the future. Many cards will offer a 0% APR when you open an account for a set time-frame. A low-interest rate credit card is one that also offers a regular APR below 14%. One keynote to take away with these types of credit cards is to factor other terms associated with fees such as annual fees.
Not all low interest cards are created equal. For instance, a secured credit card might offer a low regular APR of 9.99%. This may seem like a great deal but you’re basically pre-paying for purchases when you open a secured credit card with a deposit. What purpose does an interest rate at that percentage serve when you’re not carrying over an outstanding balance? The best low interest credit cards may not have the lowest APR all around but offer the best cost-savings when combined with other factors such as no annual fees or better approval rates based on credit history.
Credit Cards for Bad Credit
Sometimes life happens and you find yourself on hard times that end up hurting your credit score. No matter the circumstances, bad credit can make it difficult to apply for a new credit card. There are a few options that might work well for you and could even give your credit the boost it needs to apply for a better card later.
Secured cards are one of the easiest to apply for when you have bad credit or no credit as most typically don’t require a credit check. They’re not as common as standard credit cards but there are options with low or no annual fees and low interest. You just need to put down a minimum deposit to open the account and may have to provide data that shows a stream of income.
The good news with these types of cards is they track your progress in your credit history. If you’re making good on your payments and working on building your credit they may contact you with an offer to increase your credit limit or possible rewards for cash back. If you decide to close your account or switch it to an unsecured credit card don’t do so until your balance is paid in full otherwise you won’t receive your deposit back.
Prepaid Credit Cards
These types of credit cards are pretty similar to gift cards. With a prepaid credit card you’re essentially just loading a card using cash to a secure online account. Prepaid credit cards function just as traditional credit cards- they’re typically accepted everywhere and can be used for online purchases. The amount you load the card with is the amount you have to spend so you can’t overspend and it won’t impact your credit in the future. These cards also do not accrue interest and there is no credit check required to open a card. There may be a signup fee initially.
Credit Cards for Fair Credit
A fair credit score is considered between 640- 699. Individuals that fall within this range may not be able to obtain the same benefits from a credit card for consumers with great credit. There is some light to be shed when it comes to the underwriting qualifications for a credit card. Your credit health isn’t the only factor the banks use to determine who to accept or deny for a new line of credit. By law the issuers must be able to obtain evidence that the applicant has the means to make minimum payments each month. In other words, you have to provide some stream of income. Some institutions will evaluate your debt-to-income ratio from the data submitted to determine how much debt you can take on. This means if you have a reliable stream of income and minimal debt you may be approved even if the credit check is a little less than favorable.
An unsecured credit card is a suitable choice for individuals that have established a fair credit history. These are the most common types of credit cards and don’t require a security deposit to open an account. When used responsibly an unsecured card can help you build up your credit history from fair to good. Examples of unsecured cards include travel rewards cards and cash back cards.
Most store credit cards will also approve you for an account with a fair credit history which could ultimately help build your credit. You will still need to meet the underwriting qualifications of the issuer. If you have a high-ticket item you need to purchase with a flexible payment arrangement applying for a credit card issued by the retailer might be a better option than traditional credit cards. There are hundreds of popular retail chains and online merchants that offer store credit cards for consumers.
A low-interest card is another consideration for cardholders that typically carry a balance over. These will help you save money from interest charges and can help in keeping your payments within a reasonable means. As long as you’re working to make payments on time and use your card responsibly these types of credit cards will help you in building your credit.
The Credit Card Do’s and Don’ts
It doesn’t matter which option you choose to apply for with your first card – if it isn’t used in the right way it will be the wrong choice. Being a responsible credit card owner holds a lot of weight in building up your credit history. Here are some helpful tips to follow to stay on track of your finances.
Set a reminder for when your statement is due. The card issuer will set a specific date on your statement that your payment is due on each month. Making regular payments on time is critical to avoid costs from late fees and keep your credit in good standing. Mark this date on a calendar or schedule and set a reminder a few days ahead to ensure your payment is received in time. You can always call the bank or financial institution the card is issued from to negotiate the date your statement is due if the predetermined date causes conflict in payments.
Look at your statements each month. Many issuers now offer paperless statements and auto-pay options to simplify making payments. This can also make it easy to forget about checking your statements, but you should still do so. Tracking your payments and interest charges each month can help you track spending habits as well as catch errors or discrepancies in your statement that might indicate a fraud risk.
Keep your account open. Keeping your account in good standing over time will help in building your credit history. Once you’ve paid your credit card statement and no longer have a balance you can take steps to keep it active. The longer your account is in good standing the better impact it will have on your credit health. You may have a need for it later.
Research debt consolidation options before you need them. If you wait until you’re financially stressed to look into debt consolidation you may end up running into further debt problems. If you have multiple debts of the same type (such as multiple credit cards) you can consolidate them into one monthly payment and save on multiple interest charges. Carefully consider different options with balance transfer credit cards or consolidation loans before your debts get too far out of reach.
Pay off your credit cards before applying for a loan. Your credit standing will affect your approval when you are ready to apply for a loan. Lenders take several factors into account when determining approval for a loan including your debt-to-income ratio. If this ratio is 41% or greater with the loan factored in you will not be approved. Pay your credit card balances off or down as much as you can before seeking out a loan to improve your chances of getting approved.
Max out your credit card to the limit. This is a big no-no for maintaining good credit. Your credit utilization is another very big factor that affects your credit score. Utilization is how much of your credit limit is being used from the amount you’re allowed up to. You never want this to reach above 30% in order to maintain your credit in good standing.
Use your credit card like a debit. Credit cards do offer some perks over debit that can be to your benefit with cash back rewards and better security, but it shouldn’t replace them. Reward points and cash back won’t necessarily outweigh the costs from interest charges. If you will be using a rewards card for regular purchases such as gas or groceries only charge what you would actually be spending in cash. Take that cash to pay on your credit card before your billing cycle ends so you aren’t charged interest on the purchase.
Pay only the minimum due. Paying only the minimum will take longer to pay your balance off and run into additional charges. If you can’t make the full payment due on your statement, strive to pay more than the minimum due.
Don’t exceed more than 10% of your income. Your total credit card payments should not exceed 10% of the income you bring home. Keep track of your spending and monitor your payments on all of your credit cards. If you’re at nearly 10% of your income or more with all of your credit cards your debt can quickly get away from you. Avoid putting any more charges on your credit cards and pay more on your payments when you can. Seek credit card counseling or debt relief options to avoid further debt hardship.
How will the COVID-19 Pandemic Affect Your Credit
The pandemic has affected tens to hundreds of thousands of Americans across the nation. Many are facing unemployment or reduced hours as a direct result. This has many consumers struggling financially or unable to pay their bills and some may be left wondering how it will affect their credit. Many banks and financial institutions are taking factors into account that may affect their customers. Some are offering temporary relief or assistance programs on a case-by-case basis for those facing the negative economic impact.
What Can You Do?
Continue making your payments on time if you can. Even if your credit card company is offering relief from making payments due to the pandemic, if you can make efforts to keep paying on your balance even if it’s minimum. This will help to keep your credit in good standing which you may need to further assist your financial needs.
Another option you can seek to boost your credit score or keep it in good standing is reporting other payment obligations to the credit bureaus. This can help if you aren’t applying for a credit card during this time by showing your creditworthiness. If you are able to continue making timely payments on your utilities, rent or mortgage, and your cell phone bill you can ask to have these reported to benefit your credit rating. There are services available like Experian Boost that can help.
Consider consolidating your debts if you have multiple credit cards, especially if you’re paying interest on any of them. Transferring them all down to one will help avoid multiple interest charges and may help you manage your finances during this economic crisis. You can also seek professional assistance from a certified credit counselor to help further manage your existing debt.
Now would be a good time to take advantage of any rewards you may have accrued from your credit cards. If you have enough points to redeem for credit on your statement apply them to bring down your payment. Many credit card companies are working to adjust their rewards offers for their customers in response to services that are not available. Travel rewards cards are one in particular that have reworked their program since travel options have been limited. Some are allowing customers to use their points towards food-delivery service in place of credit towards car rides and mileage. Check your statements and the status of your rewards or points with your current credit cards. Find out what services or purchases they can be used for to help save on expenses you might need.
Applying for a Credit Card
If you’ve recently been furloughed or have had a major cut in your income the need for a credit card for emergencies may arise. A credit card can provide some temporary assistance during this time to cover basic essentials. What if you don’t currently have an open credit card account for these purchases? Income is one of the factors credit card issuers typically use in their underwriting qualifications for applicants. If you’ve become unemployed you will need to provide other forms of qualifying income on your application for a credit card.
In such cases you can list unemployment benefits or any public assistance payments if you’re receiving them. Any forms of payments deemed taxable by the IRS can be counted as income, which means credit card issuers can too. Additional assets and payments you receive can also be applied as non-wage income on a credit card application. These include investment returns, trust funds or inheritances you receive payouts on, alimony or child support payments, social security income, and distributions from retirement.
Apply for credit cards with a 0% intro APR while you’re in between jobs. These types of credit cards can help you get by until your income improves without incurring interest charges. Also consider a credit card issuer that allows a co-signer on accounts. There are few banks that still offer this option but some do. In the event you can’t make your payments, the co-signer legally agrees to be responsible if the debt can not be paid. If you don’t meet the income requirements to apply for a credit card ask a parent, guardian, or your spouse to be a cosigner. Some credit card issuers that allow co-signers also offer cash rewards you can both benefit from.
Building and maintaining a healthy credit can still be achieved even amid this pandemic. Carefully consider your options and be sure to read the terms and conditions when considering any type of credit card.
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