The Basics of Credit Cards

If you have decent credit, it is easy to get a credit card. What’s not easy, is finding the right credit card for you and your budget.

Have you ever watched a commercial or heard someone talking about credit card rewards and wondered if you had a decent credit card or are missing out on something spectacular?

Now is the time to learn about all kinds of credit cards and how to make decisions that are best for you. For example, do you know the answers to these questions?

Do you have secured or unsecured credit cards? Is one kind better than the other?

What is most important, APR or the annual fee charged to own a credit card?

Do airline specific cards help you pay for travel more quickly than regular bank specific credit cards?

Is it worthwhile to open a store credit card? Does it affect your credit score if you do open one?

Should you have a gas rebate credit card if I drive frequently?

Is it better to stick with one credit card company instead of shopping around for a different one?

How do credit card reward programs work?

Close to 75% of all American consumers own at least one credit card. Many pay little attention to the fine print accompanying their card application and monthly bills until something goes wrong.

Then they begin to ask themselves some of the questions above.

Debit or credit?

To begin with, let’s first delineate the difference between credit and debit cards.

Of course the debit card takes money directly from your account at the point of purchase while the credit card has a monthly billing cycle requiring a minimum payment by a specific date.

But what if your debit card is also a credit card? Then what happens? When you swipe a card that appears to have two very different uses, it is really a debit card that also has some credit card characteristics.

It’s not a true credit card because you won’t have to pay a monthly bill or interest if you miss a payment deadline because the money charged will be withdrawn from your bank account connected to the card.

Usually if you choose debit, the charge is immediately deducted from your bank account balance while a credit selection on a debit card sometimes but not always takes up to two or three days to appear on your balance and transaction sheet.

The debit-as-credit card does not affect your credit score or history and is considered to be an offline transaction, which just means it is authorized between the merchant and the credit card processor at a time after the transaction.

Most merchants receive the same amount of money whether you use debit or credit with these type cards so they have no preference of the type of transaction you select.

Secured or unsecured—a simple concept

Secured credit cards are options specifically for people who have a bad credit history they are trying to improve. The application process is quite different than that for a regular, unsecured card.

For a secured credit card, the applicant may have to pay an application fee, agree to a higher interest rate on the credit and agree to a low credit line, sometimes under $250. The issuer usually requires money or collateral (car or boat title, jewelry, something of value) that is at least equal to the credit line amount in order to issue the card. It is secured because the issuer knows there is recourse if the credit card holder does not pay back the money owed.

This is different than prepaid credit cards, which may look like credit cards but are a completely different animal. 

To use them, you have to load money on the card and accept any fees, if there are any. Prepaid cards differ greatly in their requirements of fees and charges so if you are going to use one, carefully read the information printed on the back or label surrounding the card. These cards are also great for gifts and for people who want to avoid finance charges or to keep their spending confined to a limit. `

These cards do not affect your credit history or score.

Prepaid and secured cards differ from regular, unsecured cards because the user knows exactly how much the card can be used. Once the limit is reached, the card is no longer is valid. You can usually reload prepaid credit cards (look out for fees) or simply buy another one.

By contrast there is no prepayment or collateral needed for unsecured cards, which make up the majority of credit cards. There is a limit on your unsecured cards that is related to your credit history and debt-to-income ratio.

The use of any of these cards depends on your purpose and your credit history. People with excellent credit history may use either or both.

Until they build or rebuild their credit score, individuals with poor credit history may be limited to secured and prepaid cards.

APR or annual fee? Any good choices here?

APR stands for annual percentage rate and is the yearly rate a credit card company charges on purchases you make with your card IF you do not pay the full balance each month.

The APR varies tremendously from type of card and from different credit cards available on the market.

Tip: APR can be 0% (usually as an introductory deal for a specific number of months before jumping higher—read the fine print!) to around 23%.

APR can include both interest and other fees not just the interest rate but credit card companies must notify you in advance if the APR changes. The amount of APR is set by adding the U.S. Prime Rate plus whatever margins the bank charges.

Your unsecured credit cards may have different APRs for cash advances than for late penalties. Again, you have to read about the rate on your credit card statements to know exactly what your deal is with your credit card company.

Some credit cards charge an annual fee to cardholders. Because there are several cards that charge no annual fee, those that do have to offer something special to users. Most of the time, that something special is either cash back or rewards that consumers want.

Annual fees vary greatly with ones larger than $100 usually providing greater benefits. For example, there are credit cards that have annual fees of $450 to $500. But the benefits might include large credits for travel (up to $300), TSA Precheck Fee ($85) reimbursement, free rental cars, Uber credit, extra free nights at hotels, and cash back.

If you are a frequent traveler who would use these benefits, then the annual fee may be a bargain.

Tip: you have to carefully examine the fees and benefits in relationship to your particular usage of credit.

You can probably guess the answer as to whether APR or annual fees are more important when deciding which credit cards works best for your financial life. Of course the answer is that it all depends on you. 

There are also cards that offer benefits that would make the annual fee a good deal depending on your needs.

Before you start looking at new cards, first figure out what the fees and rates are on your current cards. If you are clueless about your APR, fees, and benefits, you are making financial decisions blindly. This is one area where a few minutes a year in examining your credit card statements could pay off handsomely.