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Credit cards can help build credit by paying for everyday purchases. Understanding their ins and outs can help you use them wisely, whether paying for an emergency medical bill or the vacation of a lifetime.
Chime is here to help you learn how to use a credit card confidently. Keep reading for everything you need to know.
What is a credit card?
A credit card is a piece of plastic or metal you can use to borrow money to pay for goods and services, with the understanding that you’ll pay back the money later. It offers an easy way to pay for significant expenses, but it’s also a financial tool that helps you build credit so you can more easily get approved for future loans.
Some credit cards offer rewards, such as cashback or airline miles. Others are designed specifically for students or business employees. Others can help you consolidate debt and pay it off sooner.
There are also cards designed for those with little or no credit history. Secured and prepaid credit cards require you to put money onto the card as collateral. If you default, the lender will keep the deposit to avoid losing money. Secured cards help build credit, while prepaid cards don’t.
Find out more about what credit cards are to decide which is right for you.
How do credit cards work?
When you need to buy something, you have several choices. You can pay with cash or a debit card if you have the money in your account. For certain purchases, you might use a check. But a credit card is often the best payment choice – especially for larger purchases.
You’ll receive a credit limit when you sign up for a credit card. You can carry a balance up to that limit and either pay it off monthly or make minimum payments. As you pay off your balance, it’ll reset, so you can continue to make purchases and pay them off, helping to build your credit history.
The lender will charge interest on your purchases if you can’t pay the balance monthly. And if you fail to make the minimum payment, you could damage your credit score and your future chances of getting loans.
Read more about how credit cards work and how to use them wisely.
What is APR on a credit card?
APR stands for Annual Percentage Rate. In basic terms, it refers to the interest you pay on your credit card purchases. To calculate APR, lenders divide the annual rate by 365 to get a daily interest rate.
There are several types of APR, and the kind you’ll pay depends on your card. Your APR will also depend on your credit score: The lower your score, the higher APR you’ll pay. Improving your credit score can help lower your APR.
The lender calculates interest on your daily balance and charges it to the card at the end of each billing cycle. Paying off your balance each month means no added interest, which can decrease the amount of interest you pay; however, that’s not always possible. It’s important to make sure you fully understand how APR works to avoid surprises.
Learn more about how credit card APR works.
How does a secured credit card work?
Most credit cards are unsecured, which means there’s no collateral for the lender to fall back on. The lender will lose money if you run up a large balance and don’t pay it off.
With a secured credit card, you put up collateral (typically a cash deposit you put down upon opening the card) as a guarantee. If you default, the lender will keep the collateral to recoup their loss.
Secured cards can help you build credit. They typically have low limits that match the cash deposit amount.
As you pay off your balance each month, the credit reporting bureaus see that you’re trustworthy and able to pay off your debt. A secured card can help you qualify for unsecured cards, mortgages, and other types of loans.
Use a secured credit card to pay for everyday expenses, like groceries, and then pay it off each month before the due date to avoid paying interest on your purchases. Over time, keep an eye on your credit score to see how your spending habits affect it.
Once you’ve built your score up, you can start applying for unsecured cards to get a higher limit while continuing to build your credit.
Discover more about secured credit cards and how they work.
How many credit cards should I have?
There is no perfect answer to this question; it’ll be different for everyone. Having at least one card to build credit or to pay for emergency expenses is beneficial.
Depending on your needs, you might want to have a couple of cards from different networks, such as Visa and American Express. Additional cards can offer various rewards, such as cashback or airline miles, to help you save on everyday purchases.
Having too many cards can be harmful if you have several payments to track. You could overspend since you don’t see the money come out of your account immediately. Poorly managing your cards can hurt your credit score, making it harder to qualify for future loans or credit cards.
Using multiple cards can be a helpful practice if you actively manage your finances and keep your credit utilization under 30%. But over-relying on them and failing to make monthly payments can lead to debt.
Find out how to determine the ideal number of credit cards for you.
How to apply for a credit card
Applying for a credit card is simple, but starting can seem daunting. Whether you’re applying for your first or fifth card, it’s essential to understand the steps.
Before getting started, you need to know your credit score. If your credit score is in the “good” or “excellent” range (690 to 850), you’ll probably have your pick of cards. But if your credit score falls below 690 in the “fair” or “bad” range, it may be harder to get approved. If you have no credit history, look for a secured credit card to help you build credit.
Don’t just settle for the first offer you find. Consider what is important to you. Is a low APR worth settling for a card that doesn’t offer the perks you want? Research your options before deciding which card is the best one for you.
When it’s time to apply, many lenders have online applications. Some may offer over-the-phone applications. Brick-and-mortar banks and credit unions may allow you to apply in person at a branch if you prefer.
To apply, you’ll need to have some personal information, including your Social Security number (or individual taxpayer identification number), income, housing costs, and your name, address, and date of birth.
After applying, the lender will let either approve or deny your application. If approved, they’ll tell you the terms, limits, and interest rates.
Find out exactly how to apply for a credit card.
How to pay off credit card debt
Credit cards can lead to debt if you don’t use them responsibly. The interest can soon turn a manageable balance into an unmanageable one.
First, assess your debt, including the number of cards you have, the total balance, and the interest rates. Then, choose a debt repayment method that works for you; there are several options, including the avalanche or snowball methods, a debt consolidation loan, or a balance transfer credit card.
After deciding on a plan, update your budget to fit the monthly debt repayments. Categorize your expenses as either fixed (housing, utility bills, childcare, and insurance) or variable (groceries, entertainment, medical bills, and clothing). Then, determine where you can cut back. Failure to pay your rent or mortgage can result in losing your home. Cutting back on entertainment expenses can help you save money that you can use to repay your debt.
Consistency is vital when paying off debt. Focus on your end goal of being debt-free, and don’t stop until you get there.
Learn how to pay off credit card debt using various methods.
Smart credit card use can help improve your financial footing
Credit cards are helpful tools for building credit and paying for unexpected expenses. Use the resources above to learn how to use them responsibly.
Start building credit with everyday purchases¹ — apply for a Chime Credit Builder Secured Visa® Credit Card in two minutes without a credit check.