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Are you thinking about opening a credit card account? Or have you recently opened an account? You may feel like a novice, but worry not — we’ve compiled a guide to help walk you through the most common credit card terms. You’ll also find advice on how to be a responsible credit card user.
How credit cards work
Credit cards are lines of credit that can be used continuously as you pay off your balance. They’re a handy way to pay for items of all kinds, and can help you build credit when used responsibly. Credit cards usually have detailed terms and conditions that list fees, rewards, benefit restrictions and more. Here are the important ones you should know
Typical credit card terms
- Annual fee: This is the fee you will be charged each year — if your card has a fee. Plenty of credit cards come with no annual fee, and you might prefer to stick with a no-fee card.
- Credit limit: The maximum amount of credit you can charge on your card.
- APR: This is the annual percentage rate or, simply, the interest rate you will be charged on balances carried. The rate is annual, so divide it by 12 to get your monthly rate. Most often, this rate is variable and fluctuates with the prime rate, so your APR may change at any time.
- Cash advance APR: If you use your card to take out cash, you’ll be charged at a higher interest rate than for regular purchases.
- Penalty APR: This is a higher APR than you are typically charged, and is often the result of a late or returned payment. The penalty APR can be in effect for several months or indefinitely, depending on the issuer.
- Intro 0% period: You may be fortunate enough to have a credit card that offers an introductory period during which you can carry a balance that doesn’t accrue interest. The terms for these intro periods vary.
- Late payment fee: If you pay late, you will incur a fee that is typically greater than $30.
- Returned payment fee: Payments you submit that aren’t approved may be subject to a fee, usually $30 or more.
- Foreign transaction fee: Some cards charge a fee for purchases made outside of the U.S., which is typically around 3%.
- Cash advance fee: If you take out a cash advance, you will likely will be charged a 3% to 5% fee.
- Balance transfer fee: Any balances you transfer from an existing credit card to an eligible new card may be subject to a balance transfer fee, on average 3% to 5% of the amount transferred.
Other common credit card features
- Sign-up bonus: Your card may offer a sign-up bonus, which typically requires you to spend a certain amount within a given time period (usually three months).
- Rewards: Many credit cards offer rewards programs that allow you to earn cash back, airline miles or points for purchases. This can be a great way to be rewarded for your spending, but don’t overspend and risk falling into debt simply for the sake of earning rewards.
- Alerts: Issuers often let you set up fraud or balance limit alerts and reminders when it’s time for a payment.
- Autopay: You can set this up with your credit card issuer so you are sure to avoid late or missed payments.
Choose a card that fits your needs
There are numerous credit cards available for a wide range of needs, from building credit to earning rewards, to getting out of debt and more. You should decide what your goal is with a credit card, then compare cards from various issuers prior to applying. Some issuers allow you to fill out a prequalification form that does a soft pull on your credit. This doesn’t affect your credit score and is a great way to shop around for the best deals. One note: Prequalification is not a guarantee of approval.
Read the terms and conditions
An important step prior to applying for a credit card is to review the cardmember agreement. Each card has different rates and fees that vary based on any number of reasons, including credit history, actions you take (or don’t take), the prime rate in the market and more. It’s crucial to review the cardmember agreement so you’re aware of any fees you may be charged, as well as how the card works.
Practice responsible credit behavior
Make on-time payments. Perhaps the most important aspect of having a credit card is to make timely payments. By doing so, you avoid late payment fees and penalty APRs that can hurt your credit score.
Pay your balance in full. A great goal is to always pay your bill in full so you never carry a balance. Any unpaid balance will be charged interest (unless associated with a 0% APR promotion) and can cause you to rack up debt. This also negatively affects your credit score.
Avoid overspending. It’s common for people to mismanage their credit cards and be tempted to overspend, but with proper budgeting, you can avoid falling into debt. A good rule of thumb is to only spend what you can afford to pay at the time of purchase — this way you know you can pay off your balance.
Keep a low utilization rate. The percentage of available credit you use is known as utilization, and is a factor in your credit score. It’s important to keep a low utilization rate so issuers see you’re not a risk — ideally no higher than 30%, but the lower the rate, the better. Constantly maxing out your card raises concerns for issuers and can cause you to fall into debt.
Check your monthly statements. By simply reviewing your monthly statements, you can proactively notice any fraud that may occur on your account and isn’t flagged by your credit card company. Most companies send notifications if they think there’s fraud on your account, but they don’t catch every instance of suspicious behavior.
You can also choose to use a service to monitor your credit. MagnifyMoney’s parent company, LendingTree, offers this service for free. There are several other places now where you can check your credit score for free, across all three major bureaus.
Check your credit score and credit report. Checking your credit score on a monthly basis is a good habit to get into and can promote positive credit behavior. Read our guide on where to access your free credit score and other credit tips. It’s also a good idea to check your credit report every few months to make sure everything checks out and no unknown accounts are opened in your name. Annualcreditreport.com is the only source for authorized credit reports from all three major credit bureaus, and you can run one report annually for each bureau. We recommend spacing them out every four months.
Secure your card. Don’t leave your card unattended or loan it to friends. Your card is your responsibility and should be treated with care. If you happen to lose your card or it’s stolen, contact your issuer immediately and put a hold on your account until your card is found or replaced.
Don’t request a cash advance. Cash advances are notorious for high fees and tricky terms that can draw you into debt, so it’s best to avoid them entirely. If you need cash, look to personal loans, which may have better terms.
Having a credit card can be a great way to build a credit history, as long as you use it responsibly. Understanding all the terms, as well as your cardmember agreement, is crucial to being a responsible cardholder. Refer to this guide before signing up for your first credit card, or if you have any questions about your current credit card account. Your wallet — and credit score — will thank you.