Since starting my channel I’ve been getting lots of questions, and I’ve noticed that the one thing that everyone really has in common is that we’re all different. Specifically, we all have a difference in experience levels. Some of you have the basics down and are looking into more advanced topics, while others are only just beginning and still need to learn the fundamentals. So today instead of talking about ways to secure a loan or improve credit, I’ve decided to start with the basics:
What is a credit card?
History
By now, most of you probably know what a credit card looks like. It actually looks very similar to an ATM card, a debit card, or even a charge card. But it’s not actually any of those. It’s in a category all of its own.
You see, credit cards are actually a descendant of charge cards. Most credit and finance historians agree that the first charge card was the Diners Club card. Created in 1950, The Diners Club card would allow you to charge purchases to your charge card at certain stores or restaurants, instead of paying by cash or check. The catch was that users had to pay back the total balance at the end of every month. No excuses.
Nearly 10 years later the world started seeing revolving credit cards, or what most people would consider the “modern credit card”. This meant that you did not have to pay off your total balance at the end of every month, but instead your balance could be rolled over month-to-month indefinitely—at a cost.
Later over the decades, issuers would actually start to introduce more and more features to improve their cards, and to stay competitive and make their cards more appealing to new and existing customers.
Features
A lot of these features are actually still around today, and some of them are really important, so let’s talk about them.
Fraud Protection
First, arguably the most important “bonus” to using a credit card to make purchases is the fraud protection it provides you. Due to The Fair Credit Billing Act of 1974, if fraudulent charges are made on your card by an unauthorized user then you are only responsible for paying $50.Often though, credit card issuers will take care of that $50 for you as a sign of goodwill, so you may pay nothing at all.
Credit Limit
Second, most credit cards have a credit limit. This is a predetermined dollar amount that issuers have assigned to your account. It’s the maximum dollar amount that you are allowed to spend on your credit card. If you try to go over this amount, you may have charges declined or you may receive penalty charges.
Generally, your lender can increase or decrease your credit limit at any given time. So, it’s important to be responsible and don’t max out your card! However, you can also personally request an increase if you need to.
Balance
Third, and I know that I’ve touched on this a little bit already, but credit cards allow you to carry a balance. This is a core feature of credit cards. Balance is the word that we use to describe the amount of money that you owe on your credit card. Carrying a balance simply means that instead of paying your balance of every month, you let it rollover month-to-month—for a fee. Be careful with this though. While carrying a balance can help you in a time of an emergency, it’s generally a bad habit to be in and you can end up spending much more money in the long run.
APR
APR stands for “Annual Percentage Rate”. Okay, but the Annual Percentage Rate of what? As it turns out, the APR is a measurement of the total annual cost of your credit card. It’s the interest that you owe on the money you’ve borrowed, and it’s shown as a percentage rate. So if you’re carrying a $100 dollar balance on your credit card and your APR is 24%, then over a period of 12 months you will pay $24 dollars extra in addition to the $100 dollars that you first borrowed.
The $24 was the cost of borrowing the $100. The easiest way to find and estimate how much interest you might owe is to multiply your balance by your APR and then divide your answer by 12 months. Exact calculations are a little more complicated, but that’s a video for another time.
Grace Period
Four, most credit card issuers offer a grace period. Grace periods are the period of time after your billing cycle has ended, but also before your next payment due date. During this time interest is not charged on your purchases. It is possible to stay in a grace period perpetually if you pay your card off every month and do not carry a balance. These grace periods can vary from issuer to issuer and from card to card. So you need to check your card’s terms and conditions to be sure.
Annual Fees
Five, Some credit cards have annual fees but not all of them. Usually, you’ll see cards with an annual fee if they have more benefits and rewards—or even higher tier benefits and rewards. Annual fees can range in price from, say, $50 to $700, or more. The sky’s the limit on this, really. You can still find many rewards cards with no annual fee at all. In fact, many times these are the best beginner credit cards.
Rewards and Benefits
Six, Nowadays most credit cards issued by major institutions offer some sort of rewards or benefits. These can vary from cashback cards, to travel rewards, and more. Generally the lower the barrier to entry for a credit card, the less value the rewards offers will hold. Still, entry-level credit card rewards can be useful in an overall financial strategy.
How to Apply
Okay, so now we’ve learned all about some of the important features of credit cards. How do you get one?
Well, you have to apply. I’m old enough to remember when you actually had to fill out a form and snail mail your application to a card issuer. Today though, many credit card issuers give you the option to conveniently apply online. A lot of them offer near instantaneous decisions too. While it’s not always the case this means that it’s possible to get approved for a card within minutes, as opposed to waiting 7 to 14 days like we used to. Some issuers can still take a week or two to make a decision. So don’t be caught off guard if this happens to you.
When filling out your application, you can expect to be asked to fill out personal information. This can include your name, address, social security or taxpayer identification number, and your gross annual income. Keep in mind that you are applying. It’s not necessarily guaranteed that you will be accepted. People can and do get rejected. So you’ll want to make sure you have a fair to good, or even excellent credit score. But don’t let this deter you. If it turns out that you have little or no credit history, it may be worth it to start with a secured credit card for the first 6 months to a year.
I just want to add in as a little side note:
Please know that you should probably NOT apply to multiple credit cards at the same time. In general you really shouldn’t even apply to more than 2 or 3 spread out per year because, this will negatively affect your credit score and cause it to go down. If an issuer sees that you’ve applied for more than one card at a time, your application that might have originally been accepted could be considered too high-risk and it could be rejected instead.
Where to Find
So if there are so many options for credit cards out there you may be wondering just how to find the best one for you. Well truthfully, you have options.
Many card issuers will actually send out marketing letters via snail mail. Some of those might say you’re “Pre-approved”, but it’s important to remember that pre-approval is not the same as being approved. So, you may as well just try to find a card that’s more tailored to your needs.
While you certainly can opt for one of those cards advertised in the mailer, you can also search for different cards online. One of my favorite sites to search for credit cards is Nerd Wallet. No, this isn’t a sponsored ad. I just genuinely like them and I have personally used them to help in my search for new credit cards over the years. On occasion credit card information or promotions may become outdated on this site, although not too often.
Another option is to go to different card issuers’ websites. Some of the biggest institutions offer applications on a variety of cards directly on their site. These include but are not limited to issuers like Discover, Chase, and Capital One.
A final option is to check with your local small bank or credit union. These places usually offer at least one or two credit cards as well. Now before you pull the trigger on any one card, remember to really thoroughly research all of your options. Really compare all of your options before you decide on what works best for you.
Disclaimer: This article is not financial advice. If you need advice, seek assistance from a qualified licensed professional. See full disclaimer here.
Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com