This is a Crash Course in Everything You Need to Know About Credit Cards
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Credit is complicated, amiright?
OK, maybe not the most confidence-inspiring thing to see on a personal finance site.
But it’s true. Credit cards and other debt come with interest we often don’t understand and payment terms we can’t live up to.
Even if you’re savvy and want to keep on top of your finances, just getting hold of the credit information that’s used to decide nearly everything in your life can feel like a feat.
We’re here to simplify all of this for you. To help you get smarter about credit, pay down debt and put more money in your pocket, here’s a quick rundown of some credit card basics:
(Hint: Bookmark this page to come back to anytime you have questions about using credit cards! You’re welcome.)
How to Build Credit
The weird conundrum about credit is you have to have it to earn it — but you would have had to… have credit to earn that original credit?
It sounds like a disaster, but don’t worry. This isn’t a high school lunchroom. You can totally break into the cool kids’ circle. Here’s how to start building your credit from scratch.
Why You Should Use Credit Cards Instead of Cash
We think Dave Ramsey was wrong when he said, “Responsible use of a credit card does not exist.”
It’s true credit cards are tough to keep under control, and that’s why so many people are afraid to use them. But you can do it. And when you do, you get to reap fantastic rewards!
Which Credit Cards Should You Use?
Not all cards are equally beneficial. With some, you simply run the risk of building a bunch of debt with a high interest rate.
With others, though, you can earn free flights and hotels, points toward food and entertainment, and even cash. Here are a few to consider:
- If you’re a jet-setter, here’s how to choose the best travel-rewards card — and a few cards to check out.
- We found four great credit cards for new parents (even if your credit stinks).
- Here’s another option we like: It’s the Chase Freedom Unlimited card*. Its claim to fame? You’ll earn an unlimited 1.5% cash back on all your purchases. Plus, if you spend $500 in your first three months of opening the card (hi, groceries), you’ll pocket a $150 bonus. Get signed up — and 0% intro APR for 15 months — here.
Is an Annual Fee Ever Worth It?
Ever wonder if you should pay to use a credit card? Lots of great credit cards come without fees, so why choose one with an annual fee? Because those are often the ones with the best rewards!
Cash-back rewards could net you a profit over the annual fee for your card. In that case, the fee could be worth it.
But it gets tricky (of course). To help you figure out whether the credit card you’re considering is worth it, our contributor Steve Gilman created this simple formula.
How to Keep Track of Your Credit Score
Once you establish credit, you’re going to want to keep an eye on your activity.
Credit card companies, lenders, landlords and others will use your credit report to determine whether to trust you. You can make sure you understand what kind of impression you’ll make by watching your credit score and report closely.
(Pst. Credit score and credit report are not the same thing.)
First things first: What the F*CO is a credit score? In plain English, we explain credit score basics and why you need to know yours here.
And we compared two common apps that show your free credit score: Credit Sesame versus Credit Karma — which is best for you?
How to Read a Credit Report
You want more than just that grade. You want to understand what earned you the grade.
That’s why you’ll want to see your credit report — the statement that lists information about your credit activity and current situation, like payment history and status of your credit card accounts.
Here’s how to get your free credit report (no sneaky tactics here) — and how to understand the financial mumbo jumbo it contains.
One bummer: You might find mistakes on your report. Lenders and reporting agencies are far from perfect, so they might neglect to update your credit report when you pay off debts, for example. Or someone will hit the wrong key at the office, and your credit will be marred with some debt you never touched.
Here’s how to fix those mistakes on your credit report.
What Affects Your Credit Score?
I’ve noticed an odd phenomenon: When you visit any site that lets you check your credit score, it always has a big note that says, “This won’t affect your credit score!”
That’s true: Checking your credit score won’t hurt it. When you think about it, wouldn’t that be ridiculous? That’s like if your professors docked your grade when you ask to see your test scores.
But people still believe this myth, because the algorithm that determines your credit score is as confusing and scary as the one that determines what you see on Facebook (and nearly as life-altering…).
Here’s what’s actually included and how much each weighs into your score:
- How much of your available credit you use: 30%
- How old your credit accounts are: 15%
- The variety in types of credit you’ve taken out: 10%
- How often you’re applying for new credit: 10%
Here’s a more detailed overview of the types of activities that can affect your credit score (and those that can’t).
On a similar note, here’s exactly how closing an old credit card can affect your score.
And one more thing: What happens to your debt when you get married? A lot of bad information makes the rounds on that front, so let’s clear it up. Here are six myths about debt and marriage you should stop believing right now.
How to Pay Off Credit Card Debt
To redeem Dave Ramsey, we do like the debt-payoff method he pioneered called the debt-snowball method. (Click that link to learn all about it.)
While it’s not the most perfect way to pay off credit cards — because it lets debt sit and gather interest — it’s a smart way to get moving when you feel immobilized by how much you owe.
Experts would recommend what’s come to be known as the debt-avalanche method of debt repayment.
This method eschews the instant gratification you get with the snowball method, but it’ll probably save you more money in the long run.
How to Consolidate Credit Card Debt
Another option to consider when you have a lot of debt to pay off is consolidation. This basically means you’ll take out one big loan to pay off your smaller credit card debts.
Ideally, that loan has a lower interest rate than your credit cards, so you’ll owe less long term. Plus, you’ll just have the one monthly payment to worry about instead of a bunch of payments with a bunch of due dates.
If you want to consider debt consolidation, here are six steps to get you started.
What to Do When You’re Out of Options
Sometimes life gets the best of you. We understand that. If you’re already up to your ears in debt and not sure what to do next, we’ve got a few final pieces of advice.
Those folks on the late-night commercials who promise to help you pay off debt quickly? They spin a good yarn, but their promises are often way too good to be true.
If getting help seems like the best route for you, here are four things to consider when choosing a credit-repair company.
If you’re dealing with debt-collection agencies, you don’t have to put up with harassing phone calls. Know your rights.
Any More Questions?
Credit cards and debt are sort of ginormous issues in the world of personal finance. They’re becoming ubiquitous in our lives, even though most of us barely understand how any of this works.
We hope these basics help untangle some of the confusion — but we know there’s plenty more to cover.
What more do you want to know about credit cards and repaying debt? Send us your questions, and we hope to answer them in a future post!
*Annual Rewards amounts will change based on the amounts you enter. The monthly spending category names and definitions may vary among issuers, and categories may not align one-to-one.
The information for the Chase Freedom Unlimited card has been collected independently by The Penny Hoarder. Opinions expressed here are the author's alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. The Penny Hoarder is a partner of Credible.
Dana Sitar ([email protected]) is a senior writer/newsletter editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.