Your first credit card can help you can establish credit, buy now and pay later, protect your purchases and even score rewards. But if you don’t learn how to use a credit card responsibly, it can also help you pile up debt, interest, and fees.
So study up. Consider the information below as Credit Cards 101: a guide to making them work for you — rather than against you.
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While debit cards pull funds directly from your checking account, credit cards provide short-term loans. You can avoid interest if you understand credit cards and the billing process. Here’s the basic lifecycle of a credit card statement:
During one 30-day billing cycle, say you charge $500 worth of purchases to your credit card.
You receive a statement for this billing cycle, either online or by mail. The statement lists each charge from the past month, your current balance ($500), any previous balance, the minimum payment due and the due date.
The due date is typically 20 to 25 days after your billing cycle ends. Pay your full balance before the due date, and you won’t accrue any interest.
If you pay less than the full balance, interest will start accruing — both on the amount carried over to the next month and on any new purchases. On your next statement, you'll be charged interest based on your average daily balance for the month.
You’ve probably opened a credit card wihtout an annual fee unless you determined that the card’s perks justify the cost. For day-to-day charging, watch out for these fees
Most common credit card fees 2015 / Credit Cards
Late-payment fee: Ideally, you’re paying the full balance on your credit card to avoid interest. If for some reason you can’t pay at least the minimum payment on your statement by the due date to avoid a late payment fee, which is typically about $35. A late payment could also result in a higher interest rate on the outstanding balance.
Over-the-limit fee: If you make a purchase that tips your account over the credit limit set by the card issuer, your card could be rejected at the register — unless you've opted in for over-limit protection from your issuer. If you have that protection, your transaction will be processed, but your statement will include an over-the-limit fee. This fee is typically about $25 for the first over-the-limit charge and $35 for additional purchases that are over. You must opt-in to receive this fee in lieu of a rejected card.
Paying your balance on time and in full prevents interest and late fees and helps build your credit. With a good credit score, you’re more likely to get approved for loans and credit cards with more perks, such as cash back, higher credit limits, and lower interest rates.
How your FICO score is weighted / TravelUpdate
The two main credit scoring models, FICO and VantageScore, consider the same factors, with some variations in how they weigh them. But in general, these things matter most to your score.
Payment history: This is the most heavily weighted factor in your score and why it’s so important to pay your bills in full and on time, every time. A late credit card payment can hurt your credit score.
Credit utilization: This is the percentage of your credit limit that you’re using at a given time, and is the other highly influential factor in your score. So, if you have a $1,000 limit on your card and have charged $400 this billing cycle, you have a 40% per-card credit utilization ratio. Once you get more credit cards, credit bureaus can calculate your overall, or aggregate, utilization by dividing your total balance by your total credit limit. Say you open a second card with a $5,000 limit and have a $1,000 balance on it. Your aggregate credit utilization would be 23.3% ($1,400/$6,000=0.233). But you don’t have to do the math to track your credit utilization if you keep the balance on each credit card below 30% of the card's limit.
The length of credit history: This measures how long you’ve been borrowing money by analyzing the average length of your credit accounts and the ages of your oldest and newest accounts. The best way to positively influence this factor is to keep your first credit card open and active even after you get more down the road.
Types of accounts in use: Diversity of credit, such as loans and mortgages, factor into your score, but not by much.
New credit: Applying for new credit lines triggers a “hard inquiry,” which may hurt your score. Wait about six months before applying for another card.
Now that you know the Credit Cards 101, enjoy seeing your credit score rise without paying a dime in fees.