What basic information should I know before obtaining a credit card?

Question

I am applying for my first credit card. I see things like gas credit cards, British Airways credit cards, etc. What are the difference between these? Also, what are the basic things one needs to know about credit cards? Basically, if you pay for something using a credit card you have to pay that amount back at the end of the month? If your credit limit is $500, for example, then you cannot charge more than $500 on your credit card per month?

Answer 1

I've covered this topic in my "How does that thing with the credit cards work, again?" article.

if you pay for something using a credit card you have to pay that amount back at the end of the month

You don't have to. After the statement closes (which happens every month), there's a certain 2-3 weeks grace period during which you need to pay at least the minimum payment (about $35 minimum, or a certain percentage of your balance if more). But you don't have to pay more than that, you can "carry balance over" to the next month. You need to remember that it will cost you money. Quite a lot, even. Credit card balances is one of the most expensive consumer loans there is, rates of >20%APR aren't unheard of.

If your credit limit is $500, for example, then you cannot charge more than $500 on your credit card per month?

No, it means your balance can't be more than $500 at any given time. Exceeding the credit limit usually triggers fees and APR hikes. But after you pay some or all of your balance off - the credit limit is available again, and you can do it several times a month, you don't need to wait for the statement to pay some or all of the balance off.

Worth pointing, that carrying over high balances (relative to your credit limit) affect your credit score (lowering it down).

In my article I linked at the first sentence I provide some more suggestions on how to manage your credit cards most effectively. You should also look around for some older answers on this topic here:

Example 1 - How does that thing with the credit cards work again?

Example 2 - Should I really pay off my entire credit card balance each month?

Example 3 - If I pay off my balance every month, what am I actually paying?

Answer 2

Typically, the difference is the rate (interest charged) and types of rewards. If someone intends to carry a balance month to month, the rate will be the most important thing. If you'll pay in full each month, the reward is the priority. 2% or higher cash back is great. It doesn't seem like much, but the balance on the reward account I started when my 14 year old was born just passed $17,500. No fee, and I've never paid interest.

If you start out with a low credit limit, littleadv's advice is great.

Answer 3

Avoid cards with annual fees. They just aren't worth it except with very few exceptions such as:

1) Someone else pays the fee, for example your employer for a corporate card.
2) You charge enough that the cash back or rewards are worth more than the fee.

Another tip that I've learned over many years. If you do decide to get a rewards card, you are much better with the cash back ones. I'm fed up with airline miles cards because they have too many ways to shuffle the redemption rates as to make them practically worthless. Think of it this way. Airline miles are currency (usually) with one airline. Cash-back is currency taken by EVERY airline and every other company in the world. Why would you prefer currency with strings attached?

Answer 4

Cash back cards are generally better. The relationship between the credit card account and the reward vendor is not guaranteed to be permanent. They can changes the rules and the formula to earn or use points. How often they can change the rules is buried in the fine print.

If you expect to get $500 back from a cash back card and they change the rules you will still have your $234 you have earned so far. If they change the rules with the airline your 1/2 a ticket won't get you anywhere.

Your use of Airline X might not be long term. By the time you earn the miles they might not be flying to the city you want to. One linked to a store or gas station can have the same problem.

A card from a bank you already have an account may get you better rates, or other perks, because of the multiple accounts with the same institution.

Understand the various dates and numbers with your account: closing date, grace period, due date, minimum payment, credit limit. Understand that cash advances can impact greatly how much you will pay in interest and fees. Realize that being late will have short term and long term impacts. They will add a late payment fee, they can start charging interest on the new purchases, and can increase the rate from low (5%) to very high (24%).