Everything you need to know about credit cards, how they work, the different types, their advantages and disadvantages, the best credit cards, choosing the right one and how to apply for them.
Feel free to jump to the specific section based on your interest or read through the entire article.
- What is a credit card?
- How does it work?
- Advantages, Disadvantages, and Challenges of using a credit card
- Why you need one
- The different types of credit cards
- Banks that offer credit cards
- How to choose the best credit card for you?
- The best credit cards in the market today
- How to apply for credit cards and what is needed
WHAT IS A CREDIT CARD?
One thing the credit cards are is a convenient way to pay for things. So, instead of carrying around stacks of cash or stopping at the ATM all the time or writing checks out of a checkbook like people used to do, you can carry around the plastic or metallic credit card that has some information on it, and when you want to buy something, you transmit that information to a merchant, that merchant talks to your bank, and then your bank pays the merchant bank, and then hopefully in the future you get to pay the bank again.
So, the bank is taking a financial risk in that situation because you might not pay the bank back, of which you shouldn’t to maintain a good reputation. And so, that takes us to the second thing that credit cards are, which is an “instant loan.”
Let’s give you a quick example from before the time of credit cards. Say you have a roofing company, and you know that in the upcoming year, there are already lots of people on the books who have appointments to get a new roof but you don’t have enough money in my bank account right now to buy all the shingles and other supplies that you need to install those rooms.
You know quite alright that once you finish installing the roofs and get paid by all those people, you’ll have more than enough money to pay for all the supplies, but you don’t have it right now. That being the case, you then talk to your banker, and he says to you here’s this particular checkbook whenever you need to buy supplies write a check out of this checkbook. You don’t need to call us first.
We’ll front the money to that vendor, and then you can pay us back once you’ve been paid for installing all these roofs. Now, that’s a business line example of credit, and a credit card is very similar, it’s just a different form. Instead of being for only businesses, pretty much any general consumer can get a credit card.
Now, this whole concept of buying something now and paying for it later is precisely where a lot of people get into trouble with credit cards. Now let me show you another example of this. So, let’s say you spend a thousand dollars on a credit card over a month.
The next month, you will get a bill in the mail saying that you owe them a thousand dollars. The mail will also include the minimum amount that you can pay on there, let’s say in this example that’s $50.
The smartest thing to do in such a situation is to pay the thousand dollars that you owe right away, all at once when it’s due. But, since you’ve got the convenience of using the card and a little bit of a grace period where you won’t have to pay any interest for that thousand dollars alone basically, and you might not want to pay immediately.
On the other hand, let’s say you only pay back five hundred dollars of that thousand dollars, when the bill comes, the remaining five hundred dollars is going to roll over into the next month, and the bank is going to charge you interest on that. So, instead of owing five hundred dollars, you’re going to owe something more than five hundred dollars.
And let’s say you continue to use the card over the course of that next month, you’ll be obviously adding extra charges on top of that five hundred plus dollars and if you can’t pay all of that off in full, it will continue rolling over into the next month and before you know what’s going on, it can snowball into a giant pile of debt where you’ll be paying interest on interest.
And trust me, you won’t be able to pay that total debt down very quickly. Now, this is a situation that’s very easy to get into with credit cards, so what we recommend that if you do get a credit card, make sure that you only charge to the credit card what you know you can only pay not only in full but on time when the bill comes.
Also, credit cards are usually unsecured debt. Now, let’s give you an example of what secured debt is, so you know what an unsecured card looks like.
Let’s say you want to borrow $20 from a friend, and the friend now says, okay I’ll loan you $20 but give me your left shoe, and then when you pay the $20 back to me, I’ll give you your left shoe back. In other words, the pump is acting as collateral, to secure the loan so that if you don’t pay back the loan, the lender is going to keep your shoe, and this is precisely what happens with home loans mortgages.
So, if you want to buy a house and you get a mortgage through a bank, and then you stop paying your mortgage, the bank is going to keep your home. Now, most of the time, credit cards are unsecured; however, if you have bad credit, a bank may only be willing to issue you a secured credit card.
That’s where you put up a deposit, and then you get a credit limit for that deposit. And then let’s say you default on that credit card, well the bank is just going to keep that deposit that you gave them. But if you use the card responsibly, and eventually you can get an unsecured credit card, then you’ll get that deposit back.
Now, a lot of people ask why a bank would give you these tens of thousands of dollars potentially a line of credit if nothing is securing it? Like if they’re not getting any collateral for it. Well, the way that they decide whether to do that or not is based on your credit history. Sometimes, your credit history is referred to just like your credit but is very different from your actual credit cards.
Nevertheless, they work together very closely. So let’s say you get a credit card and then you’re paying it on time every month, then that’s going to be reported to the credit bureaus that keep track of your credit history.
On the other hand, let’s say you miss a lot of payments and you even default on a full credit card, that’s also going to be reported to the credit reporting agencies. And so whenever you go to open a new credit card, the bank that you are to open a credit card with is going to look at your credit history and decide if you are likely to pay back alone or not, and then make the decision based on that.
So, even though nothing is securing the loan, the bank has this credit history to look at, to decide whether you are likely to pay back the loan or not, and then they can make their decision based on that. And so basically, owning a credit card is most likely to be enjoyed if you’re the honest type that keeps to the commitment of paying the debt.
HOW DOES A CREDIT CARD WORK?
As will be discussed later, paying with the credit card has many benefits, including convenience, smooth tracking, and security. Paying with a credit card has three necessary steps, authorization, capture, and settlement. If you have purchased something using a credit card, then you’ve seen permission at work.
When your card is swiped at the checkout counter, or when you click Submit on the checkout form online, your card’s payment gateway then manages the process of checking to make sure you have sufficient funds available for the purchase. This is called authorization.
After verifying the funds are available, a hold is placed on the money. This is known as capture. Once the funds are captured, the merchant can hand over or ship the goods and be confident they’ll be paid. However, during that time, the merchant doesn’t have their money yet.
The process of transferring money from the customer’s credit card or bank account to the merchant’s bank account is called settlement. Settlements usually occur once each business day. And during settlement, the banks connect. Then your card’s payment gateway begins the settlement process by aggregating the daily transaction details and sending them to the merchant’s bank.
Your card’s payment network will then handle the settlement. And once the settlement is complete, the buyer’s money is transferred to the merchant’s bank account, while the customer’s bank posts a charge on the customer’s account. At this stage, the transaction is now complete, and the purchase will show up on the customer’s credit card statement.
ADVANTAGES OF USING A CREDIT CARD
Several benefits come with owning a credit card, and they include;
Building Credit History
If you’re an American citizen, you’d agree with me that having a good credit history is one of the most critical factors to success in terms of finances. This is true because, with a good credit history, you can afford to get your dream house, car, or attain any educational height by receiving outrageous credit card limit from companies. And the only way you can get to have this much history is only if you own a Credit Card.
In other words, without holding a credit card and carry transactions on it, your credit history can never be built.
If there is any trademark feature associated with the use of credit cards is in its level of convenience. With a credit card, you can afford to pay for things you need quickly, even if you don’t have the money at the moment. Little wonder why people call it the “lifesaver.”
Using a credit card in an online transaction is very secure because, when any payment process is being initiated, it passes through an encrypted chain of highly monitored service placed by your credit card company and its authorization network.
So, before anyone would want to hack or attack your credit card without your authorization, they’ll have to face the secured bureaucracy before getting to have a hold on your money. And in most cases, it’s often not an easy task for such cyber hackers.
If you’ve probably heard about credit card’s before, then you must have heard about its variety of bonuses that surround it. Ranging from rewards like gift items to cash rewards like cashback, using a credit card will not only make payment processes easy for you but will also accord you with some additional incentives such as roadside assistance with your car, in case it breaks down. All these extras put together is what sums up to make one’s experience of using a credit card worthwhile.
The best thing about credit cards is that they are widely accepted all over the U.S. Thus, it is scarce for a card to be bounced or rejected, except there is a fault with the card’s chip or perhaps there is a temporary breakdown in your credit card company’s service. Other than those exceptions, credit cards are accepted anywhere you go.
DISADVANTAGES OF USING A CREDIT CARD
Of course, everything that has an advantage will also have its downsides. So here, we are going to be looking at five disadvantages of Credit Cards
One of the main reason why people engage in impulse buying is that they have credit cards. That much knowledge of knowing that you’re with a card that is already funded with money that is not only yours, but can buy virtually 70% of things at the grocery store, is compelling enough to make you want to buy things that you don’t need. And what suffers the most when you partake in impulse shopping? Your budget!
Shatters One’s Budget
If there is anything the credit card is good at is in disorganizing one’s budget. Once you fall into the trap of having to pay interest over a delayed loan payment, a trap which most people find it hard to escape, then you can as well kiss your budgets goodbye!
Although this doesn’t apply to all credit card companies, some charge outrageous and extortionate yearly fees from their clients.
As much as we’d love to sway our minds from the reality that owning a credit card is synonymous to signing up for a debt warrant, the truth is never far off. Very few percentages of people often get to keep their records straight, while the majority is always a victim of credit card debt.
However, the second category, which belongs to those who often fall into the debt trap of paying interest, are not necessarily dishonest type individuals as most people always like to view them. The truth is, sometimes things happen that shatters their plans in such a way that they can’t afford to pay up their loan debt in time, thus, placing them in a situation of having to pay more than they originally owed.
Credit Card Fraud
One of the reasons why the use of credit card is somewhat not secure is that presently, there has been a significant number of reported credit card fraud cases here in the United States. And trust me, you don’t want to fall a victim of this kind of fraud.
CHALLENGES OF USING A CREDIT CARD
There are three significant challenges that come with the use of credit card, and we’ll be looking at them today.
The thing about using a credit card is that it’s often a honeymoon like an experience until you start owning debts you can’t pay. That’s usually the time you’ll get to see the dark side of credit card companies.
In essence, if you get to owe more than can pay, and the months keep going by, you’ll start receiving harassing and threatening calls from debtors, which will inevitably cause you to panic. And if they feel you aren’t responding well to the harassments, then things will get heated up a bit.
You will now be surmounted to appear before and the court to state why you haven’t paid and what necessary actions should be taken to repay the debt. And it’s often in this stage that most people do lose their assets.
Loss of Assets
After all, said and done, if there seems to be no possible way of repayment, the credit card company will lawfully confiscate whatever vital asset that is equivalent or more to the money you owed them
So basically, these challenges only come to play, when you’re unable to pay back your debts, perhaps as a result of greed or ignorance.
WHY YOU NEED TO GET A CREDIT CARD
To monitor Your Spending
The great thing about credit cards is that you’ll get to receive a monthly statement with all your transactions on it, which you can go back and compare to your money game plan or hook your account up to services like mint and automatically download all of your transaction data. No, more keeping stacks of receipts.
There are a ton of other reasons why you should use a credit card like in the experience of cashback, travel rewards, insurance, extension warranty, and concierge services.
Owning a credit card is one of the leading steps to achieving your American dream. Unlike the debit card, owning a credit card can assure you of owning a house, car or anything of your choice in future, as long as you have a good credit history.
TYPES OF CREDIT CARDS
All carry cards are not the same; how do they differ? Let’s find out.
Rewards Point Credit Card
The vanilla color card is ideal for first-time credit card users, so is the gold and platinum credit cards, which all fall in this category of having to accumulate points and then exchange them for gift items. It’s all in the swipe!
Cash Back Credit Card
If you’re the type who is already in the investment industry, which means you’ll be carrying out a lot of cash transactions, then you should go for the cashback credit cards.
Lifestyle Credit Card
Ever sort of caring luxury in your pocket? Well, that’s what a lifestyle credit card is for, as you can use it in shopping items at some specialized discount.
Travel Credit Card
If you’re the type that love to fly all over the world perhaps as a tourist or holidays, then the travel credit card is meant for you. With it, you collect points and miles with an airline card for maximum benefits.
Utility Credit Cards
Depending on your car or bike? You can save a great deal on gas and fuels by just using the Utility credit cards for considerable utility discounts.
BANKS THAT OFFER CREDIT CARDS
Here is a list of top banks here in the United States, who offer the best forms of credit cards.
- Bank of America
- American Express
- Capital One
- Wells Fargo
HOW TO CHOOSE THE BEST CREDIT CARD FOR YOU?
You can compare credit cards to clothes in some ways. Some are boring; some are cheap, some are expensive, flimsy, some are durable and so on. Thus, what works for your friend may not be the right fit for you. It all depends on the fees, rates, limits, and perks that are designed with individual consumers in mind.
For those who travel for work all the time, it may be a good idea to get a card that earns frequent flyer miles. And for those who spend a great deal of money in general, it would be wise to get a cashback rewards card. You should know that credit cards are not all one-size-fits-all.
When deciding on a credit card, you should take into account several lifestyle factors like how much money do I spend with my card? How do I pay back my debts? Do I travel a lot or a little? Your card should fit your lifestyle and not the other way around. Banks and card issuers would love for you to spend more than you can afford and attempt to chase rewards.
In part, that’s why rewards exist, to encourage spending through a channel that generates fees and interest revenue for these companies. So, finding a card that fits you and your life will not only help you meet your financial goals, it can also help prevent you from overspending.
So below is a representation to demonstrate the different sorts of cards you might need for different lifestyles, taking financial needs and habits into account.
So, if you’re a newbie and have no credit history, you’re probably pretty young. Meaning, you probably don’t have much money, nor do you know exactly what you’ll do with a card that gives you access to so much spending power.
So, your goals as a newbie should be to spend very little on the card and pay down your balance every month. In other words, you should get a card with a low limit and a flat interest rate.
Also, your interest rate shouldn’t be your primary concern because you’re planning on paying at the end of the month. That said, get one with a low price if you can. And rewards are irrelevant at this point your life, but cashback never hurts, so as long as you aren’t paying a fee for it.
If you’re a new parent at this time in your life, you probably have a decent credit score established. Unlike when you were in college, you need to spend a lot of money on things that are sometimes unexpected, like having a baby. So odds are you may not be paying down your balance at the end of every month.
Thus, you may need to find in some larger purchases like a house, clothes, and of course, the first year of parenthood. You’re going to find something with a higher limit, and lower interest rate. A low-interest rate that will help you finance the purchases of all the things you need for your baby and the more upper limit which will help you keep your score high while you do this.
And remember that carrying a balance of more than one-third of your credit limit can negatively affect your score. At this time, you won’t be traveling much, so a reward card would be a waste of annual fee.
If you’re a jet setter, and you’re back and forth to Moscow and Beijing every other week, and you take clients out to obscenely expensive meals that can add up. And if you’re not a big spender by nature, but it comes with the territory, and you like to get treated very well wherever you stay because, you’re home so little, you may as well make yourself comfortable. A high-end rewards program will be perfect for you. You shouldn’t mind the high-interest rate because you can pay your balance every month, and you won’t mind the annual fee because you more than earn it back in perks, at hotels and free flights.
BEST CREDIT CARDS
In this section, we’ll be categorizing the best credit cards based on the most popular categories, cashback, travel, and rewards. So going with the first one, let’s look at the best cashback credit cards.
Citi Double Cash Card
To get this card, you’re probably going to want to have at least a 680 credit score. The most significant benefit with this card is a total cashback of 2%. 1% when you make a purchase and 1% when you pay your bill off on time. Unfortunately, there isn’t an intro offer for this card, so you’re not going to get anything for signing up for this card other than an 18 month no interest balance transfer.
So basically, this card has no value in terms of signing up other than the 2% cashback that you are going to get as you use this card.
PayPal 2% MasterCard
This card is done through Synchrony Bank, and like the Citi double cash card, this card has no introductory offer whatsoever. However, you are going to get an easy 2% cashback just like the Citi double cash card; thus, whenever you make a purchase, you don’t have to pay the bill off to get that 2%. And you can redeem this 2% for cash into your PayPal account, unlike most credit cards, where you’ll get a statement credit.
In addition to this, if you do have a PayPal account, then this card will be very convenient because you can pay your bill off from your PayPal balance. In other words, it works well with PayPal; that’s why you can only get approved if you have a PayPal account. The good thing about this card is that you’re not required to have that high of a credit score, only about a 650 and above. But, you are going to want to have at least a $20,000 per year
Capital One Quicksilver Credit Card
This card offers a 1.5% cashback rate on all purchases. As an introductory offer, you can earn a hundred and fifty dollars for spending five hundred within the first 90 days of opening an account. And like all the other cards mentioned, this card is just going to cost you the low rate of zero dollars per year in an annual fee.
To get this card, you’re going to want to have a little bit of a higher credit score probably in the lower 700s at a minimum. Higher would be better, but it should be around 710 to 720 if you’re to qualify into getting this card.
Chase Freedom Credit Card
This card has a standard 1% cashback on all purchases made, with an additional 5% rate when you activate per quarter on qualifying purchases up to $1500 per quarter. So with that, you can quickly get above a 2% cashback rate if you do activate these rewards depending on what categories you do a lot of spending in. As for the intro, it has the same with the Quicksilver card.
That’s, it’s going to have a hundred and fifty-dollar cash back statement credit if you spend five hundred dollars within the first three months of having the card. In addition to this, you are going to get a one-year extension on all qualifying warranties.
With this card, if you do purchase an expensive good and two months after the manufacture, guarantee goes out of date, and something happens to it, that isn’t your fault, you’ll get an extended warranty from Chase where they will reimburse you for that good. So, there’s no reason to buy like an Apple Care subscription or SquareTrade warranty or things like that because once you qualify for the purchase, Chase has got you covered.
In addition to the extended warranty, you are going to receive a 120-day theft and damage protection up to $500 per claim and $50,000 per account, which is very useful in case you buy a $500 phone, and you drop it 30 days after getting it. No need to panic because this card has you covered. However, to get this card, you’re going to want to have around a 680 credit score or above. And the card comes in a low annual rate of $0.
American Express Cash Magnet Credit Card
With this card, you’re going to get a 1.5% cashback on all purchases. If you sign up using an affiliate link, you are going to get a $200 statement credit when you spend at least $1000 within the first 90 days of opening the account. But if you sign up direct, it could be a hundred and fifty for spending a thousand dollars within the early 90 days. The offer changes up on their website a lot.
In addition to this, you’ll get a roadside assistance hotline, and a two year extended warranty on qualifying warranties under five years, purchase protection against breaks and theft up to a hundred and twenty days after purchase, just like the chase freedom card. So generally speaking, this card is very much like the chase freedom card. However, it is better in most of the categories by just a little bit because it has a better cashback rate, a longer extended warranty, and a more extensive introductory offer.
To get approved for this card, you’re probably going to want to have around a 680 -690 credit score.
Chase Sapphire Reserve Credit Card
The best feature of the card is that it earns tons of reward points that you can redeem for travel. The card earns 3 points for every dollar that you spend on travel or dining. The scores are worth 1.5 cents each towards a trip, which means you’re getting about 4.5% back on any dining or travel purchase.
This card includes a free membership to Priority Pass which gets you into hundreds of airport lounges around the world. You can also sign up for TSA PreCheck or Global Entry, and the card will reimburse you for the fee. The card has a $450 annual fee, which may seem high; however, your first $300 in travel expenses are refunded every year. That makes the yearly price effectively $150.
American Express Platinum Credit Card
Now, this card won’t earn you quite as many reward points as the Sapphire Reserve, but it makes up for that with lots of advantages. Just like the Sapphire Reserve, this card will get you free TSA PreCheck, free Global Entry and a free membership to Priority Pass. Additionally, the Platinum Card will give you access to lots of other lounges like the Delta lounges and the American Express Centurion lounges, which are fancy.
The Platinum Card comes with lots of other benefits like hotel status, and a concierge phone number for travel. But the best feature of this card is that it’s made of a substantial piece of metal which is super useful. The Platinum Card does have a pretty high annual fee of $550 a year. However, that fee is offset by a $200 airline credit and a $200 Uber credit. If you’re not interested in fancy rewards cards and high annual taxes, you need then the Capital One Quicksilver Card
Capital One Quicksilver
This card is probably the best card for you. This is one of the only cards that have no annual fee and no international charges. So, you can use this card anywhere in the world and not spend any extra money. The Quicksilver also earns 1.5% cashback on all purchases, which is a reasonably competitive rate, and cashback is much more flexible than travel points.
Amex Everyday Credit Card
The reason why this card is the favorite for rewards category is that it has no annual fee. Usually, cards don’t allow you to transfer points to partners, but Amex Everyday is the first Membership Rewards Card with no annual fee, with which you can move to partners like Delta and Aeroplane. With this card, you’ll also get two Membership Rewards points at your supermarkets, and then you also get a 20% bonus on all aspects as long as you hit 20 transactions a month.
This card has 5x rotating categories for April through June quarter. Thus, you can earn five points per dollar on restaurants, Bed Bath & Beyond HNM and Overstock. So, if you spend is in those categories, you can get 5x up to $1,500 a quarter. Even though you cannot transfer chase freedom points to partners, still, if you do have the Sapphire Preferred or the Ink Plus, you can link your accounts and then combine all of your points for free into one of those premium accounts, and then from there make the transfer.
HOW TO APPLY FOR CREDIT CARDS AND WHAT IS NEEDED
So, how do you apply for a credit card? You found the card you want, now what? If that’s the case, go online then and look for their official website.
What most Credit Companies want to know;
What your name is, your SSN, are you 18years or older? If not, sorry you can’t get any credit card approved. Also, to better understand your personality, they’ll love to know if you’re a college student, if you’re working, how much you have as savings and your monthly expense.
Once you’ve been able to clear those questions, read their terms and policy, accept it, and hit the submit button. Now, they’ll check your credit history to know if you can pay back the borrowed the money. Before you know it, if you’re evaluated to be fit for the loan, your request will be approved, and your card will be funded.
So, to wrap it up. Even though people are of the perception that it’s improbable not to owe when using a credit card, the reverse is the case. You can use your credit card for years without having to pay interest on your debt. And the only way you can achieve that is when you know your limit and work by it. Avoid loaning more than you are probably going to payback. Once this is settled, then you’ll get to enjoy the plethora of benefits that come from using the easy and convenient credit card.