Credit cards seem convenient and easy, as you do not have to carry cash and you can pay for it later. Also, credit cards have several benefits that will make you want to use it as much as possible. Applying for a credit card is advisable as it can give you an advantage for your credit score, but be careful not to open too many accounts or ruin your credit score with them!
How Does a Credit Card Work?
Basically, a credit card works by letting you borrow money at a set limit and need to be repaid upon the agreement period. When you make a purchase using your credit card, the merchant’s credit card terminal will ask your credit card issuer whether the credit card is valid and if you have enough available credit for your purchase. The credit card issuer will send back a message on whether your transaction is approved or declined. Credit cards are referred to as revolving accounts or open accounts as you can repeat borrowing money over time.
Credit Card Terms that You Should Know
Credit cards are nice things to have. This card could also give you perks such as interest-free loans and travel benefits. However, having a credit card is a huge responsibility. If you are planning to apply for a credit card, here are the following terms that you should know.
- Credit Limit. Your credit limit is the amount of money you can borrow at a time.
- Balance. This is the amount of how much you have spent or borrowed in a period of time.
- Available Credit. It is the amount of money that you are still allowed to spend before you reach your credit limit.
- Billing Cycle. Billing cycle is the set of periods when you make purchases. This works when charges of your account are reflected on a billing statement that is sent to you after the billing cycle ends. Your billing statement should include your previous balance, payments, purchases, fees owed, interest on your outstanding balance, and a new balance for the statement period.
- Statement Due Date. This indicates the date on your billing statement in which you must pay at least the minimum payment to keep a good credit card standing.
- Minimum Payment. This is the amount of your credit card bill that you are required to pay each month. This is usually a small percentage of your total balance.
- APR (Annual Percentage Rate). The annual percentage rate is the interest you pay each year represented as a percentage of the loan balance.
How Does Interest Work on Credit Cards?
Your credit card issuer will give you a certain amount of time to pay for the balance you have borrowed. If you don’t manage to pay off the balance for each month, you will be charged interest. Typically, there is a grace period before you are charged with interest. This is between 2 and 20 days. If you don’t manage to pay in full by the end of the grace period, you will be charged a fee towards your balance. Your balance is now the added interest rate plus your outstanding balance.
In other types of loans like mortgage and car loans, APR and interest may slightly differ. However, in credit cards, APR and interest are the same. The interest rate is the annual rate you will pay when you borrow money on your credit card. Most credit cards have different interest rates. It is generally based on market interest rates, your credit history, and the type of credit card you own.
If you want to avoid paying interest, it is best to pay your balance in full before the end of your grace period.
How Many Credit Cards Should You Have?
According to the American Bankers Association, there were 374 million open credit card accounts in the US for the year 2019. The other reports found out that one in three Americans own at least one credit card. In general, there is no certain number of how many credit cards a person should have.
However, having more credit cards could actually give a boost to your credit score. This is important when getting loans, saving on issuance, and even getting a job. Having at least two or three credit cards is fine as long as it wouldn’t hinder your credit score and history.
How Does Having Multiple Credit Cards Affect Your Credit Score?
You may be thinking of how having multiple credit cards can affect your credit score. While having multiple credit cards could help you in your credit score, the influence of it only weighs a small percentage. But this does not say that it is not important. Having more credit cards will also mean having more available to spend.
Though it is fine to acquire multiple credit cards as it holds multiple benefits, it is important to handle your credit wisely. It is better to keep your credit line utilization ratio at below 30% and keep track of your payment dues. Otherwise, having too many cards will be a burden rather than a privilege.
Credit cards are a good idea to have as long as you can be responsible. It can help you build your credit score, allow you to take in interest-free loans, earn rewards, and provide shopping benefits and travel perks. Having multiple credit cards can be a great advantage as well. However, before you apply for credit cards, you should first consider the responsibility of having one or two credit cards. Remember to use each card to your best advantage, make sure to keep your balances low, and, if possible, always pay your balances in full on or before the due dates