Getting your first credit card might be an exciting experience, but you also need to take precautions. With so many providers in the market, it’s advisable to do thorough research before settling on the ideal one.
The choice you make will have a significant impact on your financial well-being. It will help you establish a good credit rating, which has various advantages. They include low-interest mortgages, auto loans, and business financing. The higher your FICO score is, the more likely you are to reap the financial benefits.
The lowest possible credit score is 300, while the highest is 850. Although it’s improbable for anyone to hit those extremes, always try to keep yours above 670. Another important aspect of financial literacy is understanding the difference between a debit and a credit card. With debit cards, you only spend the funds you deposit in your bank account. Credit cards allow you to borrow from your card issuer up to a specific limit.
Types of Credit Cards
The multiple credit cards in the market fall under these categories:
1. Standard Credit Cards
These cards are the most widely issued by financial institutions. They are unsecured, meaning the issuer doesn’t need a security deposit to prove your ability to repay advanced funds. Examples are:
- Balance transfer credit card: You can use this card to transfer your high-interest balance onto a separate card with a lower interest rate.
- Low-interest credit card: This card either offers you a low fixed APR or a low introductory rate that rises after a specified period.
2. Credit Card Reward Programs
Commercial entities issue these credit cards in partnership with financial institutions. Every time you use it, you gain points that you can later redeem for various incentives. Examples are cash back cards, travel point cards, retail reward cards, and gas cards with rebates.
3. Frequent Flier Cards
Airlines have custom cards with redeemable points as incentives. You can receive and redeem air mile credits every time you use the card. The options include an airline-specific card or a generic miles card.
4. Specialty Credit Cards
These cards are suitable if you have unique uses. They’re appropriate for students and businesspeople.
5. Credit Cards For Bad Credit
You can still apply for these types of credit cards if you have a bad credit score. Examples are:
- Secured credit cards: The card issuer asks for a predetermined amount as a security deposit before accepting your application.
- Prepaid credit cards: Although they’re not credit cards in the strictest sense, you can still use them as such. You’ll only spend the amount you transfer to the card. These prepaid cards prevent you from sinking deeper into debt.
The Annual Percentage Rate (APR) is the yearly interest rate you pay on loans or earn from your deposit account. It applies to a wide range of financial products, including mortgages, auto loans, and credit cards. APR increases the total cost of your loan by adding interest and associated fees to the principal amount.
Your credit card can either have a fixed APR with a constant interest rate for the debt duration or a fluctuating variable APR. Most lenders peg their variable APRs to the Federal Reserve’s prime rate index. Your lender should notify you in advance before changing the APR. It’s advisable to read and understand the binding agreement before applying for a credit card.
Beware of Annual Fees
Credit cards offer convenience and increase your purchasing options. You can use them to buy useful items or even fund your business, then repay later at favorable interest rates. They’re also secure and allow you to earn incentives such as cash, air miles, and other gifts. However, if you’re not careful, they might make your financial situation worse in the following ways:
- They reduce your future income since you’re using money that you don’t have.
- Your fees and APRs could cost you hundreds of dollars annually, depending on the card and how you use it.
- You could get deeper into debt by using credit cards on items that don’t increase your income or net worth.
Credit cards come in handy during emergencies such as home improvement, car repairs, and replacing broken equipment. Although readily available, avoid getting into a vicious debt cycle by using these funds for impulse and luxury purchases. A budget helps you identify and spend on essential needs.
Do Your Homework
With so many credit cards on the market, it’s easy to get confused when applying for one. Other than reading this helpful article, take your time to compare indicators such as APR. You may also consult a qualified financial advisor on the best type of card for your situation or business. Whatever choice you make, your ultimate goal should be to achieve financial freedom.