Credit Sesame on how mastering credit card basics could be your first step to financial freedom.
A credit card is more than a piece of plastic in your wallet. It’s a symbol of your financial independence. It’s a lifeline in the event of an unexpected expense. It’s a tool for building credit. And if you’re seeking practical ways to master credit card basics, you’ve come to the right place.
In this article, we’ll touch on some of the most important things you know to use a credit card well. We’ll share practical insights about how credit cards work and how to decide which is right for you. Then, we’ll dig into day-to-day management, ways to use your credit card for long-term financial health and potential pitfalls to avoid.
Understanding credit card terms
Before you apply for a credit card, it’s a good idea to know how they work. This ensures you enter the credit journey with a clear sense of what you can do after mastering credit card basics. It also gives you visibility into how a credit card affects your budget.
Credit report
Before a bank or another financial institution agrees to offer you a credit card, they might examine your credit report. This is basically a report card about your financial history and money management. It lists any other credit cards you hold, loan details and insights on houses you own or rent. A strong credit report signals to a lender that you pay bills on time and in full – and that you plan to do so in the future.
Credit score
Your credit score sums up the parts of your credit report into a single figure. Higher scores indicate you know how to manage multiple debts over an extended period. Lower scores mean you have room for improvement. They don’t render you ineligible for a credit card. It might just mean you get a lower credit limit.
Credit limit
Lenders don’t hand out blank checks or endless credit cards. Instead, they cap how much you can spend on a single credit card. This is known as a credit limit. To maintain a strong credit report and score and using some, but not all, of your available balance is a good idea.
Interest rate (APR)
This is the extra amount you pay monthly in exchange for your lender giving you a credit card. Interest is paid monthly and listed on your credit card statement. APR is effectively the same as interest and stands for annual percentage rate.
Authorized user
An authorized user is someone the primary cardholder has authorized as a second cardholder on their card account. Done responsibly, an authorized user credit card can build the primary cardholder and authorized user credit score.
Pre-approval
If you’d like to know how much credit you can get on a card, pre-approval can be helpful. This is a request for information from a lender to review your financials and determine an amount you are eligible to receive. Do research and narrow down your field of credit cards before seeking pre-approval, though. Too many credit inquiries in a short period can damage your credit score. Focus on pre-approval for one or two cards.
How to choose the right credit card
Several factors play into choosing the best credit card for you. Mastering credit card basics requires a good sense of which matter most.
First, assess your monthly budget and determine what function a credit card could play. Some people use a credit card for gas or other recurring expenses, then pay the balance at month’s end. Others use credit cards as an emergency backup for unexpected expenses beyond their egularal budget. Define your credit card’s purpose. This helps you decide how much credit, ideally, you would like to have.
Second, study interest rates. The lower the rate, the smaller your bill each month. Remember that most credit card interest rates are variable, meaning just because you have a low rate now doesn’t prevent it from rising in the future. Fixed-rate credit cards exist but are relatively rare. Aim low and be prepared tadjustto your budget if and when the rate rises.
Third, prepare your budget. Ensure you can pay your credit card balance in full each month. If not, consider how to avoid carrying a large balance for an extended period. Avoid putting your budget at risk or jeopardizing your credit score.
Fourth, seek pre-approval. This gives you better insight into the credit card type, limit and interest rate you’ll most likely receive. This helps you make an informed decision.
Managing credit card balances
If you’ve followed along, you’re in great shape for managing your credit card balance. Any credit cards should be included as separate line items in your household budget.
At the start of each month, write down your anticipated credit card expenses. Check in with yourself (and your partner, if applicable) mid-month to ensure you’re on track with your budget. At month’s end, sit down with your budget, pay your balance and consider what you’ve learned.
Life sometimes throws curveballs, and a credit card can help. What’s even better is studying your experiences and applying those lessons to next month’s budget. Celebrate your progress and your mastery of credit card basics.
Tips for improving your credit score with a credit card
To maintain and grow your credit score, it’s a good idea to pay what you owe on your card in full each month.
Use some of the credit available to you but not all of it.
Avoid carrying large balances from month to month. And don’t take out multiple credit cards within a short timeframe. These activities can affect your credit report and credit score.
Common credit card misconceptions
Some misunderstandings about credit cards can be harmless. Others can be damaging if you’re not careful.
First, some people view credit cards as financial tools anyone can get at any time. The reality is a bit more complex. Most lenders have certain criteria you must meet. Remember, the lender wants to ensure it makes its money back with interest. Recognize credit cards are a tool involving two parties, both of whom have responsibilities to the other. Do your part, use your credit card responsibly and recognize it’s a privilege to have one.
Second, there’s a common view that credit cards are a catchall for miscellaneous expenses or perhaps even “free money.” Don’t buy into this. Lax attitudes about credit card use can result in balances stacking up, big bills and the inability to cover monthly expenses. Use your credit card with a plan and define its use clearly and upfront. Nor are credit cards free money: You must pay back everything you spend with interest.
How to avoid common credit card traps
Practice and experience can help you avoid common credit card traps, such as:
- Maxing out your credit card. Pay balances in full each month and use only a percentage of the full credit available to you.
- Spending without focus. Determine how to use your card and then apply those principles responsibly. Your budget and your credit score thank you.
- Vacuuming up all the credit card offers. Too many credit requests in too short a time ding your credit score. Do your homework and find one or two cards that seem to fit best. Then seek pre-approval to ensure you are aware of the exact terms you must manage.
If you enjoyed Mastering credit card basics you may like,
- One, Two, Three, More? What is the Right Number of Credit Cards?
- How to Build Credit with Credit Cards
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
