Credit Card Basics

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A beginner's guide to understanding and choosing credit cards

Credit cards can represent new possibilities in your life, allowing you to make large purchases—like cars or vacations—and pay for them gradually, instead of all at once. Plus, building and maintaining a solid credit rating can help you get approval for loans or mortgages. But it’s important to remember that with great power comes great responsibility.

Before you jump into the wonderful world of plastic, it's wise to familiarize yourself with how credit cards work and understand what you’re getting into. This guide outlines the basics of buying on credit.

The many faces of credit cards

Although the basic concept is simple—you make purchases on credit and then make your monthly payments—not all cards are create equal. There are many different types, and knowing the difference can save you from unpleasant surprises.

Standard credit cards

Also known as “plain-vanilla,” this is the most common type of card, and the one most people think of when credit cards are mentioned. It's a simple, no-frills, buy-now-pay-later setup with a revolving balance and a limit that's usually determined by your income and credit rating.

Finance charges for standard cards usually fall in the middle ground, and there's a minimum monthly payment that varies according to the credit limit.

Premium or “Reward” cards

This fancy grade of credit card is a step above standard cards. Premium credit cards, typically called something like Gold or Platinum, will not only allow you to charge purchases, but also reward you for doing so. Incentives attached to premium cards include things like reward points, cash back, travel rewards or upgrades, and zero-percent financing or APR (more on that acronym later).

Good to excellent credit is required to qualify for a premium credit card. Most people start with a standard card and work their way up to premium.

Charge cards

Technically not a credit card, though it's still in the same family, a charge card has no limits, no finance charges or interest rates, and no minimum monthly payment. What's the catch? The balance has to be paid in full by the end of each month. If it’s not paid on time, there may be late fees or charge restrictions, or the card could be canceled.

Charge cards are not very common. The majority of them are issued by American Express.

Secured credit cards

This type of card is available for people with poor to fair credit or no credit, who are unable to qualify for a standard credit card. With secured cards, you pay a deposit that's held on the card balance, and the credit limit is at least equal to, and often a little more than, the deposit. Secured credit cards require monthly payments, and let you build or improve your credit rating.

Prepaid credit cards

Generally for people with bad credit (or who like the simplicity of a prepaid debit card). Similar to charge cards, this type isn't actually a credit card. However, unlike charge cards, they don't actually let you buy on credit. Think of a prepaid card as a debit card that isn't attached to a bank account, or a gift card that can be spent wherever credit cards are accepted—you load money onto the card, and then spend the balance like cash.

Prepaid credit cards have no interest or finance fees. They're typically used as gifts, an easy way for parents to send money to kids in college, or for convenient Internet shopping if you don't have a bank account or would prefer not to use your personal financial information online.

Making sense of rates & fees

APR, finance charges, interest rates, fees, penalties—what does it all mean? Having a healthy understanding of the numbers attached to your credit card is essential, both in choosing a card and using it responsibly.

Here's a quick glossary for the important figures and associated terms you'll run across:

APR:

 An annual percentage rate (APR) is an interest rate that's applied to the balance of the charges on your card. Depending on the terms of your card, you may have a grace period before the APR is applied. These rates can be either fixed or variable, though even fixed rates can change—provided the credit card company notifies you in writing before a rate change. more »

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