Credit cards are a type of loan, and like all loans, they have an interest rate. This interest rate is the price you pay for borrowing money, expressed as an annual percentage rate (APR).
When you use a credit card to purchase, you essentially borrow money from the credit card issuer.
Credit card Explained!
A credit card is a plastic card that gives the cardholder a line of credit to make purchases or withdraw cash.
Consumers use a credit card to purchase by borrowing money from a financial institution.
Banks or lending partners typically charge credit card interest rates and other fees, making them expensive to use if borrowers don’t repay their balances in full each month. However, credit cards can help manage finances and build a credit history.
A credit card can be a powerful financial tool for those who use it responsibly. But for those who are just starting, it can be a little confusing trying to figure out how to get a credit card in the first place.
This blog post will outline the basics of getting a credit card and explain the minimum eligibility criteria you must meet.
How does a credit card work?
When you decide to get a credit card, you essentially enter into a financial agreement with credit card issuers. You agree to make timely payments on the outstanding balance owed on the card, and in exchange, the issuer agrees to extend credit to you up to a certain limit.
The credit card issuer reports your payment activity to the major credit bureaus, which calculates your credit score. Missed or late payments can damage your credit score, so always making your payments on time is essential—understanding how credit cards work allows you to use them responsibly and avoid financial problems.
Credit cards can be used for various purposes, including buying merchandise, paying grocery stores, taking out cash advances, and making balance transfers.
Consumers must first apply through a credit card issuer to qualify for a credit card. If approved, the issuer will issue a credit card and send it to the cardholder’s home address. Then they start reporting the credit card activities to the major credit bureaus, which helps to determine credit cardholders’ financial standing.
Visa and Mastercard are the world’s two most prominent payment processing networks. Unlike American Express, Visa and Mastercard do not issue cards directly to consumers.
The issuer then charges the cardholder interest on the amount borrowed, and the cardholder is typically required to make monthly payments to repay the debt.
How is credit card interest calculated?
Interest rates on credit cards can be sky-high, and a new study has found that they’re even higher for people with low scores. For example: if your APR is 15%, but you still owe $1K+, each day of interest charges will total around 41 cents! That means over 30 days; this amount racks up to nearly 13%. That’s quite a high number!!
Interest on credit cards is typically calculated using the average daily balance method. This means that the interest you owe is based on the average of your account balance over a month.
Credit Card Interest rate calculation formula:
(APR/365)*(Outstanding Credit Card Amount) = Per day interest
(15/365)*$1000 =.41 Cents
(Per day Interest Amount )*30 = Monthly interest amount
.41*30 = 12.59 ($13)
Few tips to minimize credit card interest
Credit card interest is the number one expense for Americans, accounting for more than $750 billion in credit card debt. Almost 50% of Americans are in credit card debt across age groups.
The borrowing cost is also becoming more expensive as the Fed raises interest rates to combat rising inflation in the USA. Higher Interest Rate makes everything you buy with a credit card more expensive and can add up over time if your APR ( Annual Percentage Rate ) isn’t low enough or there aren’t other ways to lower it.
- Paying the minimum payment amount will save you from late fees, not interest. So, make complete credit card payments each month.
- Pay credit card bills in advance to get reward points and gift cards, and maintain a good credit score.
- A balance transfer card is a solution to avoid costly debt
- Go for a Credit card with a low APR
Types of credit card interest
Credit card interest rates are variable rates. There are different APRs applied for different transaction types.
- Purchase APR is the interest rate charged on purchases with a credit card.
- Balance transfers from other credit cards or loans utilize a Balance Transfer APR.
- An Introductory APR is a temporary offer and is not available from all lenders, but it often gives cardholders 0% interest on purchases and balance transfers for 21 months.
- Cash advance APR: This is typically charged for using cash at a higher rate than purchase charges.
- Penalty APR is the interest rate that the issuer charges if you do not pay your credit card bill on time, and it is usually higher than other rates.
Credit card types
When it comes to using credit cards, there are various types to choose from. Here is a rundown of the most common types:
1. Standard credit card: This is the most common type of credit card. It has a revolving balance and a variable interest rate.
2. Charge cards: These cards require you to pay your balance in full each month. They usually have higher interest rates and annual fees than other credit cards.
3. Secured credit cards: These cards require a security deposit, which is your credit limit. They’re a good option for people who are new to using a credit or have bad credit.
4. Unsecured credit card: An unsecured credit card is a type of credit card that does not require the cardholder to provide a security deposit against losses. This credit card type is a good option for people starting with credit or with a limited credit history. Unsecured credit cards often come with high-interest rates, so it is important to use them responsibly and pay off your balance in full each month.
5. Student credit cards: These cards are designed for college students who are just starting to build their credit history. They typically have lower interest rates and no annual fees.
How to choose a credit card?
There are a lot of factors to consider when choosing a credit card. Do you want a higher credit line? A low-interest rate? A rewards credit card? Or one with some other perk?
One important factor to consider is your payment history. If you have an account of missed or late payments, you might not be eligible for the best interest rates or perks. Conversely, you’ll likely have more options if you have a good payment history.
Another factor to consider is the interest rate. If you carry a balance on your credit card, you’ll want to choose one with a low-interest rate. Otherwise, you’ll pay more in interest than you would with a higher-rate card.
Finally, consider the rewards. Some credit cards offer cash back, points, or other rewards for spending. If you’re a frequent shopper, a rewards credit card might be a good choice. Just be sure to read the fine print and understand the terms and conditions before signing up. By understanding these factors, you can choose the right credit card for your needs.
How does a beginner choose the best first credit card?
Choosing the right credit card is always challenging, especially if you’re a beginner. One of the first things you need to consider is whether you want a credit card account with a low-interest rate or a rewards credit card.
A low-interest rate with no annual fees will be your best option if you carry a balance on your credit card. However, a rewards credit card may be the better choice if you pay your balance in full every month. Also, consider whether you want an unsecured or secured credit card.
Unsecured credit cards do not require a security deposit, while secured credit cards do. Ultimately, the best way to choose the right credit card is to compare your options and select the one that best meets your needs.
A few things beginners should know about credit card
Before you get your first credit card, you should know a few things. A debit card is linked to your bank account and can be used for transactions. On the other hand, a credit card is a loan to be paid back with interest.
Your bank will charge you a foreign transaction fee if you make a purchase in another currency. An authorized user is someone who is authorized to use your credit card.
A starter credit card is a good option for people with no credit history. A gift card is a prepaid card that can be used like cash. When you get your first credit card, use it wisely and make payments on time to build a good credit history.
You can use Credit cards not only for buying things online or in stores but also to withdraw cash from ATMs, make online bill payments, or pay monthly subscriptions.
Read the terms and conditions carefully. Be sure to understand the card’s terms before you apply, including the interest rate, annual fee, and late payment penalties.
Make sure you meet the minimum eligibility criteria. Most credit cards require that you be at least 18 years old and have a valid Social Security number.
Use your card wisely. Ensure you are aware of the billing cycles. You pay off your balance each month and don’t spend more than you can afford to pay back. This will help keep your credit score healthy.
If you’re having trouble managing your credit card debt, it’s a good idea to seek help from a financial advisor or credit counselling service. They can help you develop a plan to get your debt under control and start rebuilding your credit score.
Using a credit card responsibly can help you build up your credit history and improve your credit score over time. So if you are ready to take the next step in your financial journey, consider applying for a credit card today!
Applying for your first credit card
So, what are the basics? To be eligible for a credit card, you must be 18 years old and have a valid Social Security number. You’ll also need to have a good credit history and score. Lenders look at your credit score to determine how risky it would be to lend you money.
A good credit score typically ranges from 670-739, while excellent credit is considered anything above 740.
If you are looking for a credit card but don’t meet the eligibility requirements, there are several ways to improve your credit score. You can start by checking your credit report for any errors and paying your bills on time every month.
You can also try using a secured credit card, which is a type of card that requires you to put down a security deposit.
Once you’ve found a card that’s right for you, applying is easy. Most cards require just a simple online application.
You’ll likely need to provide some personal information, such as your name, address and Social Security number, and information about your income and employment history.
If your application is approved, the lender will send you a card with your account number and other essential details. Review these details carefully to understand your card’s terms and conditions.
Now that you know the basics of getting a credit card, here are the takeaways:
1) Always pay your balance in full each month. This will help keep your interest payments low and maintain a good credit score.
2) Use your card for everyday purchases like groceries and gas. This will help you build up your credit history and score over time.
3) Avoid carrying a high balance on your card. The more debt you have, the higher your interest payments will be – which can quickly add up over time.
4) Avoid Impulse Buys with credit cards.
Frequently Asked Questions (FAQs)
A balance transfer with a credit card is a way to move your outstanding balance from one credit card to another. This can be helpful if you are trying to consolidate your debt or get a lower interest rate. Most balance transfers come with a fee, so it’s important to compare rates and fees before you make a decision.
The minimum age to be eligible for a credit card is at least 18 years.
It’s impossible to get your credit card before age 18, but you may become an authorized user. Even after you turn 18, the Credit CARD Act of 2009 requires you to have either independent income or a cosigner who is at least 21 years old.
Student credit cards are a great way to build your score and get rewards. They function like regular consumer-grade plastic but have much less risk of getting into trouble if you mismanage them. They’re usually only offered by established banks that know what goes on behind the scenes when managing student loans or other guarantees.