Here at TPG, we are passionate about credit cards and the world of rewards they unlock. We believe everyone should experience the benefits of strategic credit card use. If you’re just starting to explore credit cards, the terminology and application process can seem daunting. You might feel like you’re missing some essential knowledge. If this sounds like you, you’ve come to the right place.
This comprehensive guide will demystify credit cards for you. We’ll cover everything from essential terms to the different types of credit cards available, and even break down how to understand your credit card bill. So, get comfortable, maybe grab a pen and paper, and let’s dive into the world of credit cards.
Related: How to Strategically Choose Your Best Credit Card Approach
Understanding Credit Card Debt
Before we delve deeper, it’s crucial to emphasize that while we at TPG are enthusiastic about credit cards, we strongly advise against carrying a balance on your card. Carrying a balance means you will accrue interest, which will significantly outweigh any rewards you might earn.
Alt text: Concerned individual reviewing a high credit card bill, emphasizing the risks of credit card debt.
If you’re thinking about getting a credit card, first ensure you have a solid plan to manage your spending and pay off your balance in full each month. Never make a purchase on a credit card unless you are completely confident you can repay it by the due date.
Related: Credit Card Debt Surpasses $1 Trillion: Strategies for Consolidation and Repayment
Decoding Credit Scores
A credit score is a numerical representation, typically ranging from 300 to 850, that lenders use to assess the risk associated with lending you money.
Alt text: Image displaying a credit card with a digital credit score interface visible, illustrating the importance of credit scores for card approval.
Your credit score is calculated based on various factors, including your payment history, the amount of debt you carry, and newly opened credit accounts. To build and maintain a good credit score, responsible borrowing and timely repayment are essential. Using your credit card for purchases and paying off the balance in full each month is an excellent way to improve your credit score.
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When you apply for any form of credit, including a credit card, lenders will review your credit score to evaluate your application. Generally, the most rewarding credit cards require a good to excellent credit score for approval.
However, if your credit score isn’t perfect, don’t be discouraged. We can guide you on how to improve your credit score and even how to earn rewards while you are working on improving your credit.
Related: Free Methods to Check Your Credit Score
Debit Cards vs. Credit Cards: Key Differences
When you use a debit card, the funds are directly withdrawn from your bank account to cover the purchase. This is why a $1,000 purchase will be declined if you only have $500 in your account.
Conversely, using a credit card involves borrowing money from the credit card issuer to make a purchase. When you pay your bill, you are repaying this borrowed amount. Failure to pay within the stipulated period (typically around a month) will result in interest charges, fees, and a negative impact on your credit score.
Alt text: Visual comparison of debit and credit cards held in hand, highlighting the choice between spending your own money and borrowing credit.
The primary advantage of a debit card is that it helps prevent overspending. However, responsible credit card use offers numerous benefits, including earning rewards, accessing additional perks, and building a positive credit history.
Related: Why Credit Cards Offer a Smarter Financial Choice Than Debit Cards
Decoding Your Credit Card Bill
Credit card bills can seem complex with their terms, dates, and various figures. Understanding a few key terms can easily decipher this information.
Let’s clarify “bill” and “statement.” Before online banking, cardholders received a paper statement (or bill – terms used interchangeably) monthly. This statement detailed charges for the billing period (since the last bill), the statement balance (total charges during the billing period), the minimum payment due, and the payment due date.
Alt text: Person reviewing a credit card statement online, illustrating the modern convenience of digital account management.
Today, online access allows us to check our accounts anytime. We still receive statements reflecting billing periods, but we can also see real-time transactions since the last statement. This extra information is helpful but can sometimes cause confusion.
Here’s a breakdown of common terms you’ll find in your online account:
Alt text: Example American Express credit card statement showcasing key sections like statement balance, minimum payment, and due date.
The statement balance is the total amount charged during your most recent billing cycle. Paying this amount by the due date is crucial to avoid interest charges and late payment fees.
The due date varies depending on your card and is specified in your card terms and conditions.
In the example shown, the cardholder must pay the statement balance of $89.86 by the due date of November 22nd to avoid fees.
The minimum payment is the smallest amount you can pay by the due date to avoid a late payment fee. However, paying only the minimum (or less than the full statement balance) means you’ll carry a balance into the next billing cycle and incur interest charges on that amount.
The “total balance” represents the entire outstanding amount on your card, including the previous statement balance plus any new charges since the last billing cycle closed. In this example, with $11.44 in recent charges, the total balance is $101.30 ($89.86 statement balance + $11.44 new charges). You can pay the total balance or just the statement balance to avoid fees. If you pay only the statement balance, the $11.44 will be included in the next bill.
“Available credit” is the remaining credit within your credit limit. This figure changes as you make purchases or payments. For instance, with a $4,000 credit limit and a $101.30 total balance, the available credit would be $3,898.70. Avoid maxing out your credit limit, as this can lead to declined transactions or over-limit fees.
Related: Why the Chase Sapphire Preferred Remains a Top First Rewards Card After 15 Years
Understanding Credit Card Rates and Fees
Now that you understand how to manage your credit card bill, let’s examine the essential fees credit card companies might charge.
- Annual Percentage Rate (APR): The yearly interest rate charged. Types include balance transfer, cash advance, penalty, and purchase APRs. The purchase APR, the monthly interest rate on unpaid statement balances, is the most common.
- Introductory APR Offer: A temporary reduced APR can help save on interest for purchases and balance transfers during the introductory period.
- Annual Fee: The cost of card ownership, charged annually. Some cards have no annual fees, while premium cards can charge $550 or more per year.
Alt text: Credit card surrounded by financial icons representing rates and fees, emphasizing the cost aspects of credit card usage.
- Foreign Transaction Fee: A charge for transactions in foreign currencies. Some credit cards waive these fees, while others may charge up to 3% per transaction.
- Late Payment Fee: Charged for missing the minimum payment due date. This fee is in addition to a potential penalty APR.
- Over-the-Credit Limit Fee: Applied when you exceed your card’s credit limit.
- Returned Payment Fee: Charged if your payment method fails due to insufficient funds or other issues.
Related: Choosing a Credit Card with a 0% APR Offer
Exploring Different Types of Credit Cards
For newcomers, the vast array of credit card options can be overwhelming. Narrowing your search by understanding the different types of credit cards is a good starting point.
Here are the most common types of credit cards:
General Travel Credit Cards
These cards earn travel rewards and offer travel perks not tied to specific airlines or hotels. They usually earn transferable rewards, highly valued for their flexibility.
Alt text: Busy airport terminal scene symbolizing travel and the benefits of general travel credit cards.
These cards often include benefits like travel insurance, TSA PreCheck/Global Entry credits, and airport lounge access.
For top recommendations, see our comprehensive list of the best travel credit cards.
Related: The Superior Value of Transferable Points Over Other Rewards
Airline Credit Cards
Airline credit cards are linked to a specific airline.
Alt text: Airplane taking off at sunset, symbolizing airline travel and the rewards associated with airline credit cards.
You earn rewards as airline miles or points and receive airline-specific perks like free checked bags, elite status, and lounge access.
Related: Top Airline Credit Cards Ranked
Hotel Credit Cards
Hotel credit cards are associated with specific hotel brands.
Alt text: Elegant hotel facade, representing luxury accommodations and rewards from hotel credit cards.
Rewards are earned as hotel points usable within that brand, and perks include free nights and elite status.
Related: The Best Hotel Credit Cards Available
Cash-Back Credit Cards
Cash-back cards offer the simplest rewards structure. You earn a percentage of your purchases back as cash.
Alt text: Hand holding cash and a credit card, illustrating the direct cash rewards of cash-back credit cards.
You can redeem these rewards as statement credits, checks, or direct deposits, depending on the issuer.
Related: Guidance on Selecting the Right Cash-Back Credit Card
Secured Credit Cards
A secured credit card is ideal for those with limited credit history or a lower credit score. You provide a security deposit upon opening the card, which acts as collateral for the credit card company.
Alt text: Secured credit card depicted with a lock and key, symbolizing security deposit and building credit safely.
They typically don’t offer rewards but are effective for building credit and improving eligibility for rewards cards later.
Related: Top Secured Credit Cards for Building Credit
Student Credit Cards
Student credit cards are designed for college students. They help students establish credit, develop good financial habits, and build banking relationships, preparing them for more advanced cards post-graduation.
Alt text: College students studying together, symbolizing student life and the utility of student credit cards for young adults.
Rewards are usually minimal, but they are a great entry point into the credit card world for students.
Related: The Best Credit Cards for College Students
Authorized User Credit Cards
An authorized user is added to an existing credit card account by the primary cardholder. They have spending privileges but often have limited benefits.
Alt text: Family using a credit card together, illustrating authorized users and shared credit account access.
Becoming an authorized user can help improve your credit score if you’re struggling to get approved for your own credit card.
Related: Leveraging Good Credit: Adding an Authorized User
Maximizing Rewards Earning
Each rewards card earns a specific type of rewards “currency.” For example, the American Express® Gold Card earns American Express Membership Rewards points, while the Citi® / AAdvantage® Executive World Elite Mastercard® (see rates and fees) earns American Airlines AAdvantage miles, and the Hilton Honors American Express Surpass® Card earns Hilton Honors points. These currencies have different values, so refer to our latest TPG valuations chart to understand the worth of each rewards type.
Your card’s earning rate and spending habits determine your rewards accumulation. Some cards offer a fixed rate, earning the same amount on all purchases. Examples include the Capital One Venture Rewards Credit Card, earning 2 Capital One miles per dollar, and the Citi Double Cash® Card (see rates and fees), earning 2% cash back (1% on purchase, 1% on payment).
Alt text: Credit card in hand with floating points and miles icons, illustrating the concept of earning rewards through credit card spending.
Other cards feature bonus-earning categories. The Chase Sapphire Preferred® Card, for instance, earns 3 Ultimate Rewards points per dollar on dining (including takeout and delivery), streaming services, and online groceries (excluding Walmart®, Target®, and wholesale clubs), and 2 points per dollar on travel. All other purchases earn 1 point per dollar.
Many rewards cards also offer a valuable welcome bonus (worth hundreds or thousands of dollars). To earn it, you must spend a certain amount within a specified period.
Related: Best Credit Cards for Every Bonus Spending Category
Credit Card Best Practices for Responsible Use
You might have heard warnings about credit cards leading to financial trouble. While we advocate for responsible credit card use, it’s crucial to avoid misuse.
Here are essential best practices we recommend:
Always pay your balance fully and on time. This point cannot be stressed enough. Interest charges negate any rewards earned and can quickly lead to significant debt.
Credit cards are not free money. Never spend more than you can afford to repay. Remember, you must repay the statement balance each month. Budget wisely to keep your finances in check.
Alt text: Individual managing finances and budgeting with a credit card, emphasizing responsible credit card management.
Understand credit card application rules. While the allure of rewards is strong, start slowly. Develop a credit card budget system and be aware of issuer-specific application restrictions. Plan strategically before applying.
Wait at least three months (ideally six or more) between card applications. New credit lines impact your credit score, and frequent applications raise red flags. Earn a welcome bonus, assess how well a card fits your lifestyle, and then choose your next card to complement your existing cards.
Think carefully before canceling a credit card. As your card portfolio grows, you might consider canceling unused cards. However, if a card has no annual fee, keeping it open helps lengthen your credit history, positively impacting your credit score.
Related: TPG’s 10 Commandments of Credit Card Rewards
Developing a Points and Miles Strategy
With a foundational understanding of credit cards, you’re ready to choose your first card.
You don’t need a complex strategy immediately. If rewards types are overwhelming, start with a cash-back card to build good credit habits and enjoy simple rewards.
Alt text: Travel planning scene with a map, passport, and credit card, symbolizing the strategic use of points and miles for travel rewards.
If you have a dream trip in mind, consider a travel rewards card to help make it a reality.
When you’re ready to strategize points and miles, explore our TPG guide to starting with points and miles for travel.
Related: Essential Travel Tips for First-Time and Frequent Travelers
Conclusion: Your Credit Card Journey Begins
Congratulations! You now have the knowledge to research, apply for, and responsibly use a credit card.
Explore our recommendations for the best first credit cards and use your new understanding to choose one that aligns with your spending habits and rewards goals. We’re here to support you through every step of your credit card journey.
Related: Top Starter Travel Credit Cards for Beginners
