Credit Cards 101: An intro to Credit Cards

Welcome to Credit Cards 101. By the end of this blog post, you should be proficient enough about credit cards to feel secure in acquiring them or managing them efficiently yourself.

Credit cards are traditionally a “scary” topic. They are a sort of right of passage into adulthood and the world of finances. We all know the horror stories of credit card debt leading to bankruptcy and ruined credit scores, but the truth is, if you know how to use credit cards correctly they aren’t that scary.

In this tech-savvy world, credit cards are becoming essential for online purchases, paying bills, and good credit scores for big ticket items. Use them correctly, and they can become your best friend.

We have provided a list of topics associating with credit cards and (hopefully) an easy to understand explanation.

***(Remember folks; we are in no way financial advisors. This is our knowledge of how we, as a young Millennial couple, have found success with our own incomes, saving techniques, and travel secrets. Use this as a tool at your own discretion!)***

Hard Pull / Hard Inquiry

Every time you apply for a card they will do a hard pull on your credit score. A hard pull is essentially a check on your credit score to verify you are credit worthy for this card. Typically this will result in a drop of only a few points from your score. The greatest effect of the hard pull is in the first 6 months. After 12 months the hard pull will have no effect on the score but will still show in your credit history that a hard pull was performed. After 24 months a hard pull completely disappears off your credit report. Most credit card companies will only do a hard pull on one of the three credit bureaus. Experian, Transunion, Equifax.

Average Age of Accounts

Another important factor in your credit score in the average age of account. Essentially look at how long you have had your credit cards and loans, then takes the average. If you sign up for a lot of credit cards In a short time then the average age of your accounts becomes much younger and will negatively affect your credit score. It is best to have old credit cards that you never close to give you a older average age of accounts.

Card Issuer vs Payment Network

Most credit cards have an issuer and a payment network in which they operate. There are 4 major payment networks: Visa, MasterCard, American Express, and Discover. For the most part, these are interchangeable to the consumer except for a few locations they may only accept certain payment processors. Costco being an example because they only accept visa.  Each payment network charges a small fee to the merchant or store when you make a purchase. A card issuer is the bank of financial institution who backs the card and they will use one of the payment networks. The big ones are JPMorgan Chase, Citi and Bank of America. These companies will typically use Visa or Mastercard payment networks. American Express and Discover are different as they usually are the card issuer as well the payment network on which they operate.

Credit Card Utilization

Credit utilization is a major impact of your credit score. Essentially it is how much of your available credit you are using, which most people say should be under 30%.

For example, if you have 2 credit cards, Card A with a limit of $2,000 and Card B with a limit of $8,000, you have a total credit limit of $10,000. To keep below the 30% ratio you should only be using a total of $3,000 of your available credit. This can be split anyway among your cards so having $2,000 on Card A and $1,000 on Card B is okay because this is calculated by the total limit of all cards and not the limit per card. Having many credit cards actually help your credit score because you have a very high credit limit but a very low utilization. Basically, don’t go applying for a ton of cards and max them out people. Spend wisely.

So you may be asking, do all of my purchases count towards utilization? No. Any balance that remains due when the statement for you card posts will be reported to the credit bureaus and then counts towards your utilization. If you pay your balance in full before the statement posts then the credit card company will report that you are using $0 of your available limit.

(Ohhhhhh so that is how it works? YES!) Like I have said, spend wisely. If you do have major purchases on your card that uses more than your 30% utilization, try paying it off before the balance posts. You can find that information out through your credit card portal where you pay your card off online.

Authorized User

An authorized user is someone you add to your credit card account where they get an additional card with their name on it, linking this new card to your account. They can use the card any way they like and you are responsible for paying whatever they charge to the card. Because of this, be careful on who you make an authorized user on your account. Being an authorized user on someone’s account can be advantageous especially to younger people. The best advice I give to young members looking to help their credit score is have their parents make them an authorized user on one of their oldest credit cards. This card will show up on the young person’s account and is typically backdated to when it was open. So it is entirely possible to have a credit card in your name that existed before you were born (amazing right?). This gives you a long average age (see above) of accounts and jump starts your credit history because you now have an old card with on time payments for many years.

The negative side?

The balance on the card effects your total utilization so keep this in mind.

Missed payments also effect the authorized user as well.

Most card issuers allow the removal of authorized users so if it begins to become a problem on their credit score the owner of the account can contact the card issuer and have the card removed. This is true of Chase, Barclays, and Citi (3 of the big card issuers). American express is more difficult to get an authorized user removed.

Sign Up Bonus

Many cards offer sign up bonus to entice new card holders. Sign up bonus usually state; if you get this card and spend $X,XXX amount of dollars in the first 3 months they will give you a few hundred dollars in points or cash back. Sign up bonus can be highly lucrative. See our post on traveling to Norway at little expense to us and our future post on travels across Europe at practically no cost to us!

Annual Fee

An annual fee is the fee the credit card company charge you on a per year basis to have the card. Sometimes they fee is waived the first year and other times it’s not. Annual fee cards are not always bad as they normally come with greatly expanded benefits like travel and trip insurance or better earning potential. Don’t always shy away from cards with annual fees. Do make sure you utilizing the benefits as much as possible. Paying the annual fee on a card you never use is a waste of money.

Rewards Points/ Cash Back

Almost all cards earn some sort of rewards points or cash back. The typically earning rate is 1% or 1 point per dollar spent. Some cards offer bonus categories where you earn 5% or 5 points per dollar in certain categories. Using the right card at the right location is essential to maximizing earning potential. A lot of the time, the companies lose money in these bonus categories with the hope that you will get used to using the card and use it everywhere else as well. Some cards are strictly cash back where you can only get a statement credit or a check mailed to you at the end of the year. Other cards allow you to purchase gift cards or transfer points to travel partners such an airline frequent flyer accounts. This is key to success at traveling at low cost to you!

Foreign transaction fees.

Many cards charge foreign transaction fees if you use them in a currency other than US dollars. These fees can range from about 1-3% of the transaction amount. If traveling abroad it is best to get a card with no foreign transaction fees.

Chip and Pin Vs Chip and Signature

In the US we have seen the rise in chip cards since the Target breach a few years ago. This is something Europe has had for many years and is just now catching on in the US. We still haven’t quite caught up as most of our cards are still chip and signature vs chip and pin. The difference is when we use our cards we put the card in and then sign for our purchase. A chip and pin card you put the card in the then have to enter a 4 digit pin number. To us it doesn’t make a high difference and our cards should work almost anywhere overseas, we just have to sign a receipt. The only issue that occurs is in automated train ticket kiosks which almost always require a chip and pin card (This was not a fun experience, we struggled to get a readable ticket before the train arrived in a foreign country. Word of advice- plan ahead and print your ticket from home insuring you have plenty of ink in your printer!) We have also had issues in the Barcelona airport where McDonalds required the use of a kiosk to order food. They required a chip and pin card as well.

Cash Advances

Most credit cards allow you to use your credit card in an ATM to get cash out. This will result in a automatic cash advance fee as well as interest which starts accruing immediately on the amount that was withdrawn. This is pretty much a no-no when in comes to credit cards and should never be used. We prefer to call the credit card company and have them lower the cash advance fee to $0 so this can never occur on my card.

APR

APR stands for annual percentage rate or essentially the interest rate on the balance of your credit card. This APR is a yearly rate so to get the interest you would be charged on a monthly basis you can take the APR and divide by 12. A 7.8% APR would result in a .65% interest charge per month on your balance. (This is a simplification, the interest is actually charged daily on your average balance, but you get the idea.) Most credit cards have very high APR from 16% to 30%. To avoid the interest charge, you simply pay your balance in full every month. Banks love it when you pay interest because it makes them money. Bottom line, pay off your balances and never pay interest.

Credit Card VS Charge Card

A credit card and charge card look very similar but are actually different things. A credit card allows you to carry a balance and pay interest on that amount over time. A charge card must be paid off in full every month. Very few cards are strictly charge cards. Most of them are issued by American Express.

We hope this post was beneficial to you in explaining the many aspects of credit cards along with a few tips to successfully use them.

If you have any questions or comments, please don’t hesitate to write them below!