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Credit Cards 101 – NerdWallet

By on March 11, 2021 0

Credit cards offer convenience, consumer protection, and a quick way to get good credit, assuming you use them responsibly. Use them recklessly and your credit may suffer, which affects your ability to borrow money in the future. Understanding how credit cards work will help you choose the right cards for you, manage them well, and save money.

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The basics of the credit card

What is a credit card?

A credit card is a plastic or metal card that gives you access to a line of credit offered by the bank that issued the card. Whenever you pay for something with a credit card, you are borrowing money from the card issuer to cover the purchase. You then have to repay that money, either in full at the end of the month or over time.

How do credit cards work?

When you’re approved for a credit card, the bank allows a credit limit – the maximum amount you can borrow – to be used at your discretion. Your credit limit will depend on factors such as your income, other debt, and the amount of credit available on other cards.

The payment networks – Visa, Mastercard, Discover and American Express – process credit card transactions. They make sure the purchase money gets to the merchant and the correct cardholder is billed.

When your bill arrives, you have the option of paying a certain minimum amount, paying the entire balance, or paying a certain amount in between. Paying just the minimum each month is ultimately the most expensive option, as it will cost you the most in interest. Paying in full is the best option; when you pay in full each month, you get a Grace period this allows you to avoid paying interest on purchases at all.

Your credit card issuer reports your payments to credit bureaus, the companies that prepare credit reports. Your payment history counts for 35% of your credit rating – a three-digit number that indicates how risky it would be to lend you money. You should pay at least the minimum by the due date each month to avoid late fees and potential damage to your credit score.

How are credit cards different from other cards?

A debit card is linked to your checking account; debit card purchases automatically withdraw money from your account. You use your own money to pay for things rather than borrowing it. Some debit cards bring in rewards, but they are generally pale in comparison to credit card rewards. Debit cards also have fraud protection.

A prepaid debit card is not linked to a current account; instead, you ‘load’ money onto the card and can only spend what you have loaded. These cards often charge a lot of fees that you wouldn’t pay with a regular debit card. Prepaid debit card offer some protections, and they come with limitations. For example, some prepaid debit cards do not offer access to ATMs or mobile banking services. In addition, not all traders accept them.

Neither debit cards nor prepaid cards will affect your credit scores because using them does not involve borrowing money. Only a credit card will affect your credit score.

Types of credit cards


Rewards credit cards give you something back for every purchase you make. Usually, these cards require good credit. They come in different types:

  • Cash Back Cards give you money back. You can usually get this money in the form of a check or deposit to a bank account, or you can use it to reduce your balance.

  • Airline credit cards and hotel credit cards give you miles or points that you can redeem for free flights or stays with the card’s partner airline or hotel chain. There may be restrictions on how you redeem your rewards on these cards, such as when you cannot travel.

  • General travel cards give you points that you can use to pay for your travel expenses. They are more flexible than branded airline or hotel cards.

  • Store credit cards reward you for your loyalty by offering you discounts or other benefits for your purchases at the store that provided the card.

Rewards cards are ideal for cardholders who pay their bill in full each month. When you maintain a balance, the interest charges reduce the value of the rewards.


Low interest rate cards don’t give you any rewards; instead, they offer value with a lower interest rate, making it less expensive to maintain a balance. Many times these cards will come with a Launch APR 0% period, giving you time to pay off a large, interest-free purchase. You usually need good credit to qualify.


A credit card balance transfer allows you to transfer your debt from another issuer to take advantage of a lower interest rate. Usually, these cards require good or excellent credit.


Credit card options for those with less than good credit are more limited. Rewards are rarer and interest rates are higher. Use these cards to improve your credit so you can get better offers down the road:

  • For bad credit, your best option is usually a secure credit card. These cards require a security deposit which you get back after closing the account or upgrading to an unsecured standard card. In the long run, a secured card is cheaper than unsecured bad credit credit cards, which tend to charge high fees that, unlike a security deposit, you never get back.


Being a university student does not automatically qualify someone for a student credit card. The Credit Card Act 2009 prohibits issuers from giving cards to people under the age of 21 unless they have proof of income or a co-signer, someone willing to stake their credit for help the applicant build his own. When that is not an option, a secured credit card is one way to build credit.

Reasons to get a credit card

Debit cards are attractive because they don’t involve borrowing money or accumulating debt, but they also don’t help you build a credit history. Building credit is one of the main benefits of using a credit card. Others include:

Sign-up bonus. The bonus could help you create an emergency fund (in the case of a cash back card) or take a trip.

Current rewards: The rewards reimburse you for a portion of the money you spend.

Construction credit: Building a good payment history can help you borrow money in the future at lower rates.

An introductory period of 0% APR: This allows you to avoid interest on purchases or balance transfers during a promotional period.

Flexibility: While it’s best to always pay off your balance in full each month, a credit card allows you to pay off things over time, which is useful when you have a big purchase to make or a financial emergency.

Postage of a credit card

Credit cards can be chargeable, but most of them can be avoided with responsible use. They include:

Interest payments: Credit cards can have different interest rates, or APRs, for purchases, cash advances, and balance transfers. When you pay in full each month, your purchases do not earn interest.

Annual fees: Some cards charge an annual fee, ranging from around $ 20 to hundreds of dollars. An annual fee may be worth paying if the card gives you rewards and perks that outweigh the cost, but in most cases you shouldn’t be paying a fee just for the privilege of having the card in your wallet. .

Late payment fees: The cost varies by issuer, but federal regulations limit the amount of late fees. In 2018, late fees for the first time were capped at $ 27; and the fee for a second late payment within six months was capped at $ 38. Late fees also cannot cost more than the minimum payment due.

Balance transfer fees: Typically, balance transfer credit cards charge 3-5% of the transferred debt amount. Some cards waive the fee when you transfer debt within a certain time frame.

Foreign transaction fees: Most cards add an additional 1% to 3% on transactions made with non-US merchants. Travel credit cards generally do not charge these fees, and some issuers do not charge them on any of their cards.

Tips for using your credit card effectively

The benefits of using a credit card responsibly outweigh the costs. Here are some good practices to adopt:

  • Keep your balance below 30% of your available credit

  • Wait at least six months between credit card applications

  • Review your account online weekly to track spending and avoid fraud

Using a credit card responsibly is a simple and effective way to build healthy credit. You will be thankful for doing so when you are able to afford affordable borrowing in the future.

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