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Understanding Credit Cards: Everything U Need To Know

Getting your first credit card can definitely seem like opening Pandora's box. No need to panic! Let us uncomplicate it for U. Learn the basics about having a credit card and avoiding its potential downsides with UMe’s “Everything U Need to Know about Credit Cards” article.

The 8 Most Important Things U Need to Know About Credit Cards

1. What is a Credit Card?

A credit card is a tool with a unique number attached to an account that lets you borrow money to pay for goods and services, up to a certain limit, with the understanding that you will pay it back. Credit cards can help you build credit and cover emergency costs, but they may also lead to debt if you charge more than you can comfortably repay on time. Unlike when you pay cash for something, purchases made with a credit card can be subject to interest and additional fees.

2. How Does a Credit Card Work?

Purchases you make with a credit card must be paid back to your lender within the monthly grace period, or you will also pay interest. Fees can also be a possibility depending on the purchase type and your payoff speed.

Before dipping, tapping or swiping your card, it’s a good idea to familiarize yourself with the following terms:

Interest Rates

An interest rate is an amount that you’ll be charged to borrow money with your credit card. The amount that you will pay in interest is a percentage of the amount that you borrow. So, it’s best to choose a card with the lowest interest rate possible.

Interest rates can increase or decrease depending on several factors. Rates typically depend on the type of card that you have, your credit history, and which lender you choose. Typically, if you have a good credit rating, your interest rate (also known as APR or annual percentage rate) will be lower. 

Credit Limit

Your credit limit is the total amount that you can spend on a credit card. Your limit will generally be calculated based on your credit history and your income level.

Minimum Payments

Minimum payments are due once a month. They’re typically a percentage of the total balance that you owe. A warning: If you neglect to make a minimum payment every month, your credit history will suffer, and improving it will take time even if you course-correct the following month.

Total Balance

Your total balance is the entire sum of your purchases. If your balance is carried from month to month, the total will also include any accrued fees and interest.

Myth #1: “Leave a balance on your card.” Nope nope no. Don’t do it! Pay off your balance every month, so you can avoid paying interest on your purchases.

3. Why Do People Get Credit Cards?

People get credit cards for a variety of reasons. However, some of the most popular reasons are to cover short-term expenses and create account protection.

Short-Term Expenses

If your motivation for getting a new card is to go on a no-holds-barred shopping spree, you may want to pump the breaks. Credit cards are best for purchases that you plan to pay off quickly. Like F-A-S-T. As we mentioned above, it’s ideal to pay off your card’s balance every month.

Account Protection

If someone uses your debit card without your permission (A.K.A. fraud), it can temporarily cause cash loss in your bank account while you navigate the reimbursement process established by your financial institution. Credit cards can provide added account protection because you can keep your daily credit card purchases separated from your checking account.

4. Credit Card Types

There are two main types of credit cards: unsecured & secured.

Unsecured Credit Cards

Unsecured credit cards are typically offered to borrowers with established credit histories. If you get an unsecured card, you will sign an agreement promising to pay off the charges, plus interest and fees.

Secured Credit Cards

If your credit history is limited, consider a secured credit card. You’ll put money in an account as a security deposit, which you then make charges against. Think of it as borrowing from yourself to build up your payment history.

Secured card limits usually start at a few hundred dollars. Once you establish a satisfactory payment history (typically after at least six months), you will likely be able to switch to an unsecured card.

5. Credit Card Rewards

Some credit cards offer “cash back” for making purchases. Others accrue points that can be redeemed for travel expenses, gift cards, and merchandise. In reality, working toward those rewards cards may cost you more in interest so compare your options to make the best financial decisions.

Did you know: If you are on the hunt for a credit card, you can shop around! Rate shopping is when you apply with different lenders to see which one can offer you the best rate. Compare and contrast available offers. Similar credit pulls (AKA credit inquiries) are typically counted as a single inquiry if it’s done within a short time frame. So, your credit score won’t suffer from you doing your homework!

6. Credit Card Pros & Cons

UMe Pro Tip: When used strategically, credit cards are a convenient way to make purchases that will be paid off quickly.

Con: In real life, expenses may come up that can’t be paid in full right away. If you plan to make a purchase that will take a few months to pay off, did you know you can consider a personal loan? With a personal loan, you’ll get a mapped out payment plan, that shows exactly how much it will cost you in total, to borrow the money.

7. Credit Cards & Credit Scores

Credit scores are a tricky subject because they fluctuate based on many factors. A good rule of thumb is to pay your card off every single month if you can. Large balances, late payments, and balances carried long-term can ultimately hurt your credit score.

Myth #2: “Max out your card” OMG, don’t do it! Maxing out a credit card means using the maximum available limit until you don’t have any more left to borrow. Potential lenders frequently see maxed-out cards as a sign that the borrower has more debt than he or she can pay back. So, a large balance can prevent you from having the borrowing opportunities that you might need down the road.

Better advice: Keep your balance at zero or below 30% of the total limit. Eg. If your limit is $1,000, keep the balance below $300.

8. Credit Card Fees

So this generally isn’t easy to answer because credit card fees vary depending on the card type. Keep an eye out for things like:

Finance Charges

Finance charges are the amount charged on top of what you spent on the credit card. This is based on the monthly interest charged to carry a balance beyond the monthly grace period.

Annual Fees

An annual fee is a once-a-year fee charged on some cards to keep them open. Although, not all cards have this fee. (The UMe credit card has zero annual fees!)

Cards with or without annual fees are equally as common. So, you’ll likely see both types along your credit card journey. Our advice: Look for a card without an annual fee to save some extra cash! (Like the UMe card!)

Cash Advance Fees

Cash advance fees are charged when you withdraw cash from your credit card. Other fee types to consider are foreign transaction fees, over-limit fees, late fees, and balance transfer fees. To understand borrowing costs, we always recommend reading the fine print. Not all cards have the same fees, so you can make a good decision based on what your current needs are. (The UMe credit card has zero cash advance fees!)

Are U Ready for A Credit Card?

Now that you’ve read everything to know about credit cards, you’re probably ready to get the right one. Ideally, the first step is finding one that fits your financial goals.

For advice, reach out to a financial professional (we have some really knowledgeable folks at your disposal at UMe!). We can review your history and help you find the best solution, and can we say our UMe credit card is a pretty awesome one with these incentives:

  • Low, fixed rate
  • Earn rewards – like cash back – on every purchase!
  • No Balance Transfer Fees, No Cash Advance Fees & No Annual Fee
  • Instant card issue in-branch
  • Extra security and perks when enrolled in Visa Checkout
  • Verified by Visa fraud detection + Zero Liability
  • Online account management
  • Friendly, personal UMe Credit Union service (we think you’ll like this the most!)

Plus, we can offer you great advice on managing your new credit card well. Before opening a credit card, shop around, review the terms and conditions and then ask questions.

Check out our credit card interest calculator to learn how much you’ll pay in interest on your new credit card.

credit card interest calculator

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