Most of us are familiar with what a credit card is. We may own several or know someone who has one. When you hear the words credit card, you may have a variety of emotional responses based on your experience or the stage you’re in in your life. If you’re a child, you may be longing for the day to become an adult so you can have one of your own. Owning a credit card is a big responsibility. If we’re not careful, we can find ourselves buried in debt and overwhelmed in the process. Many of us would like to be able to use a credit card responsibly and benefit from the increase in purchasing power. Below are things you may not know about credit cards that can help you better use them.

1. UNSECURED & SECURED CARDS

An unsecured credit card is what most people are familiar with. You fill out an application with a credit card company, a bank, or some other financial institution, and they will give you a card if you are approved. That card will come with a credit limit, interest rate (APR), and other terms and agreements.

Fewer people are familiar with a secured credit card. With a secured card, you go through the same process of applying to a financial institution, but your approval is not as heavily based on creditworthiness as with an unsecured card. The person who is applying for a secured card is required to provide a certain amount of cash to use as their credit limit. You will still be charged an interest rate (APR), and other terms and agreements will accompany the card. For example, a person may open a secured card with a bank with $500 of their money. With that card, the cardholder can make purchases up to $500.

An individual who has a low credit score can use a secured card to build their credit. As their credit increases, a person may apply for an unsecured card with the same company or elsewhere. Some companies may reimburse the money that was first deposited after a certain period of time if their creditworthiness has improved.

2. BILLING CYCLE & GRACE PERIOD

A credit card billing cycle is the time between the beginning and the end of a credit card statement. This time period is usually 28-31 days, depending on your credit card company. Your credit card statement will inform you of the start of your billing cycle, the end of the cycle, and how many days are in the billing cycle.

The grace period of a credit card is the time between the end of a billing cycle and the payment due date. The grace period is also the time period when, if you make the full payment on your statement “new balance,” you can avoid paying any interest. Don’t make the mistake of thinking the grace period is the same as the billing cycle. The grace period is usually 21 days from the end of the billing cycle, but your statement will let you know when it is. If you look at your credit card statement carefully, you will realize that your “payment due date” does not fall on the same date as the following billing cycle closing date. If all this is too confusing to avoid paying interest, pay your credit card statement in FULL by the “payment due date.”

3. CLOSING A CREDIT CARD

There’s a great chance if you have ever owned a credit card, you have maxed it out for one reason or another. You may have found yourself in an emergency where you were short on cash and had to use credit to cover an expense. It may have been a struggle to eventually pay off the amount, and the experience left you with bad memories. Most people in this situation close their credit cards to avoid future temptation. Some work on developing an emergency fund so they don’t have to rely on credit. This is a good choice, but closing a credit card account can have consequences that are not expected. One consequence is it lowers your credit card limit. A decrease in your credit limit can lower your credit score.

Part of your credit score determination is based on credit utilization. Credit utilization is the percent of your credit you are using. If you have two credit cards, each with a limit of $1000, your credit limit is $2000. If you use one of these credit cards and make a purchase of $1000, you have utilized 50% of your credit. It looks more favorable on your credit report if you only use 30% of your credit limit; in this case it would be $600. For whatever reason, you may decide to close the other credit card, which has a $0 balance. In doing so, your credit utilization would increase to 100% if you didn’t pay off the balance. I would suggest not closing your credit cards but instead creating an emergency fund of cash so you don’t have to fall on your credit cards as a first and only resort for emergencies.

4. MAKING MINIMUM PAYMENTS

Your credit card statement will inform you of your payment due date along with your minimum payment due. Your minimum payment is the minimum amount you can pay to keep your account in good standing. Not making your minimum payments can have such consequences as late fees and a report to the credit bureau that your account is delinquent.

Other than keeping your account in good standing, there are no benefits in making the minimum payments. If you’re in a financial jam and can’t afford to make more than the minimum payments, that is understandable, but it should not be a practice. Making the minimum payment can take many years to fully pay off the balance on a credit card. That is only if a person doesn’t continue to use that card. If a person continues to use their credit card and only make minimum payments, they will never pay off the balance and end up spending a great amount on interest. It’s important to understand that making minimum payments is only to keep your account in good standing and not to pay down a credit card balance.

5. A WAY TO BUILD CREDIT

One cause for the misuse of credit cards is the belief that it is an addition to your available money. A person who believes that the $500 they have in cash plus their $1000 credit limit on their credit card gives them a total of $1500 will run into trouble. They have a $1500 purchasing power, but they do not have $1500 in cash. The $1000 credit limit, if you choose to use it, is only a hold on your future income.

Many people are unaware that you can use a credit card to build your credit. Utilizing 30% of your available credit and paying off your balance monthly is a great way to build your credit history. As your credit improves and you’re able to increase your credit limit, this has the potential of making you look more creditworthy in the eyes of lenders.

6. CASH ADVANCE

The concept of a credit card is pretty straightforward. It’s a piece of plastic that you can swipe, insert, or type in its numbers for online or phone transactions, which gives you access to a certain amount of money you can use and pay back sometime in the future. Having a credit card makes it possible to go about your day without using cash. In some cases you may run into a situation where you can’t use a credit card but need to use cash. If you find yourself in this situation without any alternatives, you can use your credit card like an ATM card and withdraw cash. Keep in mind that the interest rate on cash advances might be higher than your regular transaction.

7. FEES

Most people are aware that they have to pay interest if they carry a balance on their credit cards. They may not be aware of some of the other types of fees that come with their card.

Some other types of fees are:

Late Fees are fees that are charged when payments are not made on time.

Balance Transfer Fees. If you choose to transfer a debt or the balance of another credit to a new credit card, you may be charged a balance transfer fee. A person may choose to do this to take advantage of lower interest on the new credit card.

Cash Advance Fees are fees charged for withdrawing cash from your credit card. A company may limit the amount you are able to withdraw.

Foreign Transaction Fees are fees charged on purchases outside the country you are from. It also can be on purchases done online from a foreign purchase.

Annual Fees are fees paid once per year for having the credit card account.

8. FEE WAIVERS

If you’re not aware of the many different types of fees that come with having a credit card, you may also be unaware that you can ask to have fees waived. It never hurts to ask. There are occasions where a customer service representative may not waive the complete fee, but they may lower it. In any case, you’re still better off.

9. NEGATIVE CREDIT CARD REMARKS

Many people do not know that there is a limitation on how long certain negative remarks will stay on their credit report. Different negative information has different time durations. Most people know that a Chapter 7 bankruptcy stays on your credit report for ten years and a Chapter 13 stays on for seven years. Your credit card delinquency also has a limitation for how long it stays on your credit report since your last payment, which is 7 years.

10. CAR RENTAL

Some car rental companies only allow you to rent a car with a credit card. Even though over the years this is becoming more relaxed, it’s still more preferred than other payment options. A car rental service may allow you to use a debit card but also ask for added information such as proof of address.

11. PROMOTION & REWARDS

Credit card companies, like any other business, need to get new customers in order for their business to grow. One of the ways they do this is by having promotions. One of the promotions you may be familiar with is 0% interest for 12 or 18 months. Another promotion is they’ll allow you to make balance transfers with no fees. These are great deals, but creditworthiness can be a factor in a person being qualified.

Credit card companies can be very creative with the type of promotions and rewards they offer. Some companies offer cash back, travel rewards, or a point system. If you’re deciding on getting a credit card, it’s good to shop around to see which promotions and rewards are right for you. Different credit card companies structure their reward systems differently. One company’s cash back percentage may be higher than another but only offer cash back on certain purchases. The same with travel rewards. A company may only offer travel rewards with a certain airline, hotel, or rewards.

FINAL THOUGHT

There are many benefits to having a credit card. You can use it to improve your credit and rent a car if you need to. Many people are unaware of many important aspects of having a credit card. Being uninformed of the eleven things covered here about credit cards can leave you missing out on great benefits. This will help you get the most out of a credit card and make them seem less mysterious and complicated.