Credit cards can be your friend or foe. They promise perks like cash back, airline points, and the benefit of building credit for buying a car or home. But they can also get you in financial trouble. Americans currently carry $1 trillion in credit card debt, which is the highest it has ever been.
Many people find it hard to resist buying things they can’t afford, which is where debt trouble starts. Educating yourself about credit, however, is the best way to be a savvy consumer who uses credit cards wisely. Here are the five things you need to know about credit cards:
1. How Do Credit Cards Work?
Credit cards are like borrowed money. A credit card has a limit that you can spend before the card is shut down. The card issuer, which could be a company like Chase, Bank of America or Citibank, extends an unsecured loan to you for one month. Unsecured means there is no collateral for extending this credit to you.
You receive a statement each month that shows how much you borrowed against that limit. You have one month to pay it back before interest accrues according to the annual percentage rate (APR) that came with the card. You’ll usually have a minimum payment that can be as low as 1% of the balance. As long as you make the minimum payment, you won’t receive a “late” ding on your credit report; however, it isn’t wise to carry a balance, because interest can accrue quickly.
2. Should I Carry a Small Balance?
It’s not advisable to carry a balance on your credit cards. The main reason being that you’ll be charged interest, which increases the cost of whatever you purchased. Let’s say you bought a sweater for $100. If you only pay the $10 minimum payment and carry the $90 to the next month, you will be charged $11.70 in interest if you have an APR at the U.S. average of 13%. Now, that sweater costs you $111.70.
The benefit to using credit cards is to build your credit, but you can do so by paying off the full balance each month. The rule of thumb is to borrow no more than 30% of your credit limit and to pay it off in full and on time, every time.
3. What Happens When I Apply for a Credit Card?
When you apply for a credit card, you get a “hard inquiry” on your credit score. This means that a third-party looks at your score to see if you meet their standards. This hard inquiry results in a negative hit to your score.
Applying for multiple credit lines in a short period of time can decrease your score further. However, multiple inquiries for what’s known as installment debt such as student loans, auto loans, and mortgages within a short period of time are bundled as one inquiry because you’re expected to compare different offers for these loans.
Furthermore, getting approved for all of the credit that you applied for will count negatively against your score, because of the “new credit” and “length of credit history” categories. Don’t open a credit card when you’re shopping for an auto loan or a mortgage, because you need to give your score time to recover from these hard inquiries.
4. What is a Credit Score? Why Does it Matter?
In the U.S., credit scores are based on your credit files and a statistical analysis that will generate a number showing your creditworthiness. That’s a long way of saying you’re being scored on your likelihood to pay your bills.
Information from the three credit bureaus Experian, TransUnion, and Equifax is aggregated to show your score. The benefits of keeping a good credit score include being able to have great interest rates on mortgages, auto loans, and personal loans. Landlords may also take a look at your credit score to determine if you’re an eligible tenant. Employers have increasingly started looking at credit reports before hiring a candidate, which has risen from 19% in 1996 to 42% in 2006.
Americans are entitled to one free credit report per year from the three bureaus, but this doesn’t include a credit score. You can go to a site like CreditKarma.com and access your credit score at any time. Don’t like what you see? Some ways to improve your credit score include:
- Checking for inaccuracies in your credit report. Make sure there are no erroneous late payments. Check that the amounts owed are accurate, too.
- Set up automatic payments for your credit cards. It’s common for people to forget to make credit card payments, but this can cause your score to drop. Set up automatic payments for the highest amount you can pay. If it’s the full balance, that’s even better. Just make sure it’s more than the minimum payment.
- Focus on reducing your debt. Create a payment plan and a budget so you can reduce the amount of debt you owe.
5.What is a Balance Transfer?
Transferring your balance from one credit card to another has the benefit of giving you 0% interest for a fixed period of time. These cards usually offer 12, 18 or 24-month periods to pay off the debt. Balance transfers are a great tool to get out of debt because no interest accrues while you make the payments.
The caveat is that applying for a balance transfer card will cause a hard inquiry on your credit score. Some cards also charge a fee for transferring your balance, which effectively adds to the total amount due. Missing a payment can also invalidate the 0% interest offer and you may end up paying way more than you planned. Be sure to read the terms and conditions carefully to know what you’re getting into.
Recommended Credit Cards for Students
Many students are in a position that they don’t currently have credit but would like to build it responsibly. Here are some recommended credit cards for students:
No Credit Check: Good for People with 0 Credit
- $35 annual fee
- 39% APR
- No credit check necessary to apply
- The refundable deposit you provide becomes your credit line limit on your Visa card
0% Intro APR: Save Money on Interest for the First Year
- No annual fee
- 0% APR for the first 12 months, 13.99% – 23.99% after that
- $150 cash rewards bonus after making at least $500 in purchase(s) within the first 90 days of account opening
- Earn 1% cash back on purchases, 2% cash back at grocery stores and wholesale clubs and 3% cash back on gas for the first $2,500 in combined grocery store, wholesale club, and gas purchases each quarter
Bonus Rewards: Earn Rewards for Purchases
- No annual fee
- 0% APR for 6 months for purchases; 10.99% for 6 months for transfer balances
- Regular APR 13.99% – 22.99%
- Get a dollar-for-dollar match of all the cash back you’ve earned at the end of your first year
- Earn 5% cash back at places like gas stations, grocery stores, restaurants, Amazon.com, or wholesale clubs
- Good Grades Rewards: $20 cash back each school year your GPA is 3.0 or higher for up to the next 5 years
Bonus Points: Earn Rewards Points for Dining and Entertainment Purchases
- No annual fee
- 0% intro APR for purchases for 7 months; 15.74% – 25.74% APR after 7 months.
- Earn 2,500 bonus points after spending $500 on purchases within the first 3 months of account opening
- 2,500 ThankYou® Points are redeemable for $25 in gift cards, electronics, and other great rewards when redeemed at thankyou.com
- Earn 2X Points for Dining Out & Entertainment Earn 1X Points on All Other Purchases
Using credit cards wisely means practicing good habits with your spending. Pay attention to your credit report and credit score and diligently pay off your balance in full each month. Avoid giving in to temptation by only using your credit card for things you can afford to pay cash for. Following these tips will help you to take control of your finances and establish good credit in no time.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.