Importance of understanding credit card information

Quick insights

• Credit cards can be more than just a quick and convenient payment method.
• In addition to their important role establishing and building a credit history, credit cards can offer benefits like rewards on spending, purchase protection, travel insurance and more.
• Through responsible credit card use, including a history of on-time payments, it’s possible for your everyday purchases to help improve your credit score.

Credit cards, when used responsibly, can be a helpful tool for managing personal finances. They can help with budgeting, provide a safety net for emergencies, and offer rewards and benefits. Understanding what a credit card is, how it works, and the role it plays in personal finance management can be helpful to anyone who uses it, be they a first-time cardholder or a longtime credit card user.

Credit card basics

Let’s start with a few key facts about the what, when, why and how of credit cards:

• What: A credit card is a payment card issued by a financial institution, usually a bank, that allows cardmembers to borrow funds with which to pay for goods and services. The borrowed money must be paid back, and if not paid back within a certain time frame, you may be charged interest.
• When: Unlike a debit card, which deducts money directly from your bank account, a credit card allows you to borrow money up to a certain limit to make your purchases. You then pay this money back at the end of the month or over time with interest.
• Why: Credit cards play a crucial role in building a credit history. Regular use and timely payment of credit card bills may reflect positively on your credit report. This could enhance your creditworthiness and potentially allow you to get other lines of credit and better terms on loans.
• How: A credit card operates on a revolving credit system, where the cardholder is given a set credit limit and can make purchases up to that limit. At the end of each billing cycle, the cardholder can choose to pay off the balance in full or carry over (revolve) a part of the balance to the next month, in which case interest is charged on the outstanding amount. When it comes to building and improving credit, credit cards may play an important role. Each time you make a purchase with a credit card and subsequently pay off your balance on time, this information is reported to the credit bureaus and may help to increase your credit score over time. Therefore, responsible use of a credit card could be a key strategy in managing and improving your credit health.

Key vocabulary for credit cards

Responsible credit card use involves keeping your balance low relative to your credit limit, paying your bills on time, and not applying for an excessive amount of credit, among other things. But if you’re new to credit cards, even these terms might seem overwhelming. Below, we’ll examine the key terms that can help you better use and understand credit cards:

• Annual Percentage Rate (APR): A card’s APR is the yearly interest rate charged on any outstanding balance on your credit card. It's important to understand that different types of transactions (purchases, cash advances, balance transfers) may have different APRs.
• Credit Limit: A credit limit is the maximum amount of credit that a credit card company or financial institution has made available to you.
• Billing cycle: This is the length of time over which your credit card usage is recorded and a bill is generated. At the end of each billing cycle, which typically lasts a month, you’re required to make at least the minimum payment towards your credit card balance. There is usually a grace period between the end of the billing cycle when the statement is generated and the payment due date (usually between three and four weeks).
• Balance: Your balance is the current amount of money you owe to the credit card company. This includes purchases, cash advances, balance transfers, fees, and any interest you've accrued.
• Minimum payment: A minimum payment is the smallest amount you can pay on your credit card bill to keep your account in good standing. Paying only the minimum can lead to higher interest charges over time.
• Due date: Your credit card’s due date is the date by which your minimum payment must be made to avoid late fees and potential damage to your credit score.
• Grace period: A credit card’s grace period is the time during which you can pay off your credit card balance without incurring interest charges. This typically applies only if you pay your balance in full each month.
• Late fees: Credit card late fees are charged if you fail to make your minimum payment by the due date. Setting up automatic payments can be a helpful way to avoid late fees.
• Rewards: Credit card rewards are benefits that you earn for spending on your credit card, such as cash back, points or miles. Different cards offer different rewards programs.
• Credit score: A credit score is a numerical rating that represents your creditworthiness, based on your credit history. Credit card activity plays a significant role in determining this score.
• Credit Bureau: A credit bureau is an agency that collects and maintains individual credit information and sells it to lenders, creditors, and consumers in the form of a credit report. The three major credit bureaus in the United States are:
  • Experian: Experian collects and aggregates information on over one billion people and businesses, including 235 million individual U.S. consumers and more than 25 million U.S. businesses.
  • Equifax: Equifax collects and maintains information on over 800 million individual consumers and more than 88 million businesses worldwide.
  • TransUnion: TransUnion's database contains more than 200 million files profiling nearly every credit-active consumer in the United States.
  These bureaus collect data about your financial behavior and history, compile this information into a credit report, and use it to generate a credit score. This information is then used by lenders and creditors to assess your creditworthiness.

Resources for learning about credit cards

There are many resources to help you learn more about credit cards:

• Websites and online resources: Websites like the Chase Education Center offer comprehensive information on credit cards, explaining everything from the basics of credit card use to more advanced concepts like credit utilization ratio. There are also numerous online publications and financial literacy programs that provide educational content on personal finance and credit cards, including some through universities and community colleges.
• Podcasts: Podcasts and online videos are an increasingly popular way to educate yourself about a wide array of topics, and credit cards are no exception.
• Books: Books and audiobooks can offer in-depth insights into credit cards and personal finance.
• Personal help: A financial advisor or credit counselor can provide personalized advice based on your specific circumstances.

Please note that not all information and sources are accurate and reputable; you should be careful to use trusted sources for your information about financial products like credit cards.

Benefits of understanding credit cards

Credit cards could have many benefits over cash, checks, debit cards and other payment methods, but it’s important to understand their ins and outs to get the most out of them:

• Help avoid mistakes: Understanding credit cards could help you avoid potentially costly mistakes, like missing payments or carrying a high balance, which can lead to significant interest charges and might negatively impact your credit score.
• You can build a credit history: Regular, responsible credit card use may help build a strong credit history, which in turn could help improve your credit score over time. There are numerous advantages to a strong credit score, including a higher chance of getting approved for loans and credit cards with favorable terms in the future.
• Help achieve your financial goals: Credit cards can help you achieve financial goals, like buying a home or starting a business, by helping you to build a strong credit history (if used responsibly).
• Understanding the benefits of rewards: Many credit cards offer rewards on purchases you would normally make. By taking the time to understand these rewards, you can maximize your earnings through welcome bonus offers, spending categories with accelerated rewards rates and more.

Bottom line

Understanding credit cards can help you improve your financial literacy, avoid potentially costly mistakes and achieve your financial goals. Responsible credit card use, such as making timely payments, keeping a low balance and not applying for more credit than needed, might help build and improve your credit score. Through utilization of free resources from reputable sources and careful consideration of your card’s terms and conditions, both before applying and while using your card, it’s possible to level up your understanding and get the most out of your credit cards. When used responsibly, credit cards can be a powerful tool in the management of your personal finances.