Our Guide to Understanding Credit Cards

Understanding and Choosing the Right Credit Card

In January's financial literacy seminar with the Springfield Housing Authority (SHA), Mike Crews, Universal Banker III, covered the basics of understanding and choosing a credit card. Credit cards are an essential financial tool that can help you pay for emergencies, build your credit score, and make purchases quickly and conveniently. That said, there's a lot of fine print that goes along with receiving a credit card. Understanding the fine print will go a long way in helping you avoid debt and other fines.

"Using a credit card is simple, right?" says Crews. "You take it out and swipe it or insert it at checkout.  But choosing the best credit card can be difficult. Knowing how credit cards work is crucial in finding the card that meets your needs. At Town and Country Bank, we pride ourselves on helping our customers understand the array of rewards, protections, fees, and terms associated with cards so they can make the best decision."

By understanding how credit cards work, it becomes easier to choose the right card for you.

Credit Card Basics and Terminology

A credit card is a revolving line of credit, which means the balance goes up and down as you make purchases and payments. It works as a buy now, pay later system and is a convenient way to buy goods and services without carrying cash. It's also an excellent way to build your credit score, as long as you make payments on time. Your credit limit, sometimes called a credit line, is the maximum amount you can borrow at one time. This is determined by several things, including your credit history, current income, and outstanding debt. Each month, you are expected to pay off at least a small portion of what you borrowed, called the minimum payment. While the minimum payment is required, it's always a good idea to pay off as much as you can each month to avoid falling into debt.

Some creditors will have a grace period between the time your statement is issued and when your payment is due, but grace periods are not required by law. If your creditor does have a grace period, you will not be charged interest on new purchases if you pay your full balance by the due date.

Credit card rates and fees vary from card-to-card, which can make choosing one difficult. Below are some important factors to look into while shopping around.

Annual Percentage Rates (APRs)

APR is the cost of credit expressed as a yearly rate, including interest and other charges. If you plan on keeping a balance on your credit card account, you'll want to look for cards with a lower APR. 

"Many folks believe that one APR applies to all types of transactions offered by a credit card," says Crews. "That's not always true. Credit cards can have different APRs for different transactions." For example, credit cards may have a different APR for purchases, cash advances, and balance transfers from another card.

Using your credit card to get cash is a type of cash advance. When you get a cash advance using a credit card, you'll likely end up paying a higher APR than you would for purchases. You must read your cardholder's agreement carefully to learn what may be considered a cash advance, which may include getting money from an ATM.

Teaser APRs

Buyer, beware! Low introductory APRs, also called teaser APRs, are often used to attract new customers. For example, you may receive a piece of mail offering 0% interest on purchases for the first 12 months, then a variable APR between 15%-20% after the 12 months are over. It is important to understand how long the teaser rate will last and the new rate once that period is over. While your creditor cannot impose new rates during the advertised period, you must pay off the card in full before that period ends. Otherwise, you'll end up paying a much higher interest rate on the existing balance and any future purchases.

Credit Card Fees

Most credit cards vary when it comes to the fees associated with them, but the most common are listed below.

Late fee – charged for not making a payment on time.

Annual fee – charged every year to use the card. If you have a good credit history, you may be able to find a credit card without an annual fee.

Cash advance fee – charged when you use a credit card to get cash.

Foreign transaction fee - charged when you make a purchase in a foreign currency.

Balance transfer fee – charged when you transfer balances between cards.

Credit-limit increase fee – charged when you ask for and receive an increase in your credit limit.

Over-limit fee – charged when you overspend the available credit on the card.

Rewards

Teaser APRs, penalty APRs, and credit card fees? It seems like there are a lot of downsides to having a credit card. That's why creditors usually offer some type of reward for using their credit card, including rebates, points, and airline miles. While these rewards seem fun and enticing, they can lead to overspending. For example, the card may have a deal where you'll receive a reward if you spend $2,000 within the first six weeks of having the card.

While this may seem like a good deal, it also encourages you to spend more than you might typically spend. Remember to stick to your budget to avoid a huge credit card bill each month.

Unsecured and Secured Credit Cards

Financial institutions offer two types of credit cards: unsecured and secured. Thus far, we've been focused on unsecured credit cards, for which creditors let you borrow money with the expectation that you can and will pay it back. No collateral is required.

Secured credit cards require collateral. As collateral, you may be required to keep a dedicated savings account at the financial institution you got the card from with funds that equal your credit limit. For example, if your credit limit is $250, you'd be required to keep $250 in the savings account. Should you not pay your credit card bill, the institution would use the account's funds as payment.

With a secured credit card, making the minimum payment each month should help boost your credit score. However, the opposite can happen if you use too much of the card's credit limit. Like an unsecured credit card, using as little of your credit limit as possible is the best way to avoid racking up too large a bill each month.

Secured credit cards are a secondary option for people who don't qualify for an unsecured credit card. The collateral serves as a backup to ensure your bill gets paid on time. While the credit limit is usually lower than an unsecured card, you may be able to obtain an unsecured card after a certain period of on-time payments are made on the secured card.

Applying for a Credit Card

There are many ways to apply for a credit card. You can apply at a bank, online, or in a retail store. Keep in mind that creditors often pay to have their products advertised, so comparing cards is a good way to see the different pros and cons that comes with them.

When you apply for a credit card, you are called the credit card applicant. It is illegal to provide false information on these applications, including misinformation on your identity and income. Anyone under the age of 21 who wants to obtain a credit card must have a qualified co-signer on the account or otherwise prove they can repay the debt.

The company that issues the card is called the creditor. You can apply for a card individually or with another person. When you apply as an individual, you receive individual credit based on your assets, income, ability to pay, and credit history. When you apply for a card with another person, you earn joint credit based on the assets, income, ability to pay, and credit history of both you and the person you apply with. Remember that both you and the person you signed with are responsible for the credit card bill, regardless of who uses it more.

Finally, an authorized signer is someone you allow to use your credit card account. You are legally responsible for paying all charges, interest, and fees that result from an authorized signer's use of the credit card. Be careful who you allow as an authorized signer, as they may damage your credit score if the credit card account is misused.

Keep Up With Our Financial Literacy Seminars

To keep up with topics covered in our financial literacy seminars with the SHA, check out our blog! Not sure where to start building your financial future? Visit us at one of our 12 conveniently located branches to speak with a banker about building a financial plan that’s right for you.