A beginner’s guide to credit cards.
Key takeaways:
- Credit cards function as short-term loans, enabling users to buy now and repay later.
- It's important to keep credit card balances under 30% of the credit limit. This practice boosts credit scores and demonstrates to lenders that the user is financially stable.
- Inactive credit cards can lead to account closure by the issuer, which may harm credit scores by shortening credit history or lowering available credit.
Getting approved for your first credit card is a big achievement. For many young adults, this milestone provides the freedom to spend money without relying on cash or parents. But using a credit card without understanding the basics can quickly lead to unexpected debt, fees, and long-term financial headaches. Here’s what you should know to manage your card responsibly.
How does a credit card work?
Credit cards allow you to buy now and repay the balance later, either all at once or gradually. Unlike traditional loans, you can repeat the process within the confines of your credit limit without submitting a new credit application. Paying the full balance by the due date each month avoids interest charges. But if you roll over your balance month-to-month, interest charges will be added to what you already owe.
Basic Credit Card Terms
| Term | Definition |
|---|---|
| Annual Fee | The yearly cost of owning a credit card. Some credit card providers offer cards with no annual fees. |
| Annual Percentage Rate (APR) | The annual interest rate on credit balances. |
| Balance | The amount of money owed on the credit card. |
| Credit Bureau | A reporting agency that collects information on your credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and TransUnion. |
| Credit Line | The highest amount that can be charged on a credit card account. |
| Credit Rating | A financial institution's assessment of your debt management skills. A good credit rating is essential for borrowing money or applying for a credit card or loan. |
| Grace Period | The time after a payment deadline during which you can repay the loan without paying interest or a late fee. |
| Introductory Rate | An interest rate provided by credit card issuers at the beginning of a loan. These rates are usually lower than standard rates. |
| Minimum Payment | The minimum amount of money that you are required to pay on your credit card statement each month to keep the account in good standing. |
Smart strategies for managing your card:
Using your credit card wisely from the start can set the stage for a lifetime of healthy financial habits. Use these tips to help you make the most of your card while avoiding costly mistakes:
Understand cardholder responsibilities.
Read the entire credit card agreement or terms and conditions. Be mindful of the card's annual fee, interest rate (APR), and any additional charges such as late payment or foreign transaction fees. Knowing these details helps you prevent extra costs and surprises.
Never skip a due date.
No matter which card you choose, late payments can harm your score. They remain on your credit report for years and lead potential lenders to view you as a risky borrower. Set up automatic payments in Online Banking to ensure timely payments.
Pay your balance in full whenever possible.
Carrying a balance often means you will have to pay interest on your debt, increasing the overall cost of your purchases over time. Set yourself up for success by adding credit card spending to your monthly budget so you have the funds to bring the balance to zero by the statement due date.
Watch your balance.
While a new credit card approval and the associated credit limit is reason to celebrate, there’s something important to keep in mind. Maxing out your credit line can cause serious damage to your finances. It’s best to maintain your balance below 30% of the card’s limit. For example, if your limit is $1,500, don't carry a balance over $450. This is a simple way to avoid chronic overspending, maintain your good credit score, and demonstrate to lenders that you aren't overextended.
Monitor account activity.
Reviewing your statements and transactions regularly helps you quickly identify unauthorized activity. The sooner you report suspicious activity, the faster the credit card issuer can help secure your account. Staying alert also helps catch purchase errors and keep track of forgotten subscriptions which can be a drain on your finances.
What if I don’t use my credit card?
Leaving a card untouched may seem harmless, but it has downsides. If your card is inactive for too long, the issuer may close the account. That move can lower your credit score by shortening your credit history or reducing your total available credit, two key factors affecting your credit score.
With the right habits and a clear understanding of how credit works, you can build a credit score that opens doors. Apply for a Commerce Bank credit card today!
