Credit cards are a critical part of modern finance. They can be used to conveniently pay for almost anything, the bills you pay for them are important in your credit score, and they can even give you rewards and other cash back. Because of their widespread usage, it’s very important to understand them well. In this blog, we’ll take a look at how they work, how to get one, their advantages and disadvantages, and how they impact your credit score (and vice versa).
What are the requirements for a credit card?
- Age: To apply for a credit card, you must be at least 21. If you’re 18 with an independent source of income or a co-signer above the age of 21, you can also get a credit card.
- Credit score: Every credit card has a minimum required credit score. To get the best cards with the highest rewards and the least APR, you’ll need good or excellent credit (at least 670, or 800 for an excellent score). If your credit score is not that high, or you have little or no credit, you can apply for a secured card to build up your credit score but still have some sort of card in the meantime.
- Identifying information: You will need your legal name, date of birth, and Social Security/Individual Taxpayer Identification Number.
- An address: In order to apply, you will need an address. You can use a home or business address, but not a PO box. The only exceptions are APO and FPO boxes, used for military members serving overseas. Keep in mind, however, that this address does not need to be your mailing address. The mailing address can be a PO box if that’s more convenient for you.
- A verifiable source of income: This is most important for those with low or no credit scores, or those under 21. The minimum income you can have to apply for any certain credit card varies based on the card.
Who pays for it before the customer pays back?
There are four parties involved in every credit card transaction:
- A card issuer, or bank, which is what gives you your card
- A merchant or vendor, who is the person or business that you are buying from
- A payment network, like Visa or Mastercard, which connects the vendor to your card issuer
- An acquiring bank, which is the vendor’s bank. It uses the payment network to get money from the issuer.
Your card issuer will pay for the transaction, and then you will pay that back monthly in the form of a credit card bill.
Advantages of credit cards
- Convenience: You don’t need to carry cash everywhere you go. Credit cards are much more compact and easy to use, especially since they’re accepted almost anywhere now.
- Keep records of your spending: The bank that issues your credit card tracks how you spend your money, and sometimes, depending on the credit card, will give you a yearly summary of your spending. This is a great tool to help you get a bigger picture of your finances and what your money goes towards.
- Discounts, rewards, and cash back: If your credit score is good or excellent, then you might qualify for credit cards with low APR or credit cards with cashback. That can help save you money in a way that paying with cash won’t.
- Protection against theft: If your card is stolen and payments made on it, then it’s not that difficult to report those payments as unauthorized and report your card missing. You’ll get your money back without too much hassle. And if a product that you order is incorrect or otherwise doesn’t work, depending on the card you may get purchase protection, which will give you your money back quickly.
- Builds credit: If you pay your credit card bills on time each month, that can be a huge contributor to your credit score. Even if you’ve already been paying loans, which get reported to credit bureaus, credit cards are a different type of loan, which will help you show diversity in your different types of credit, which also increases your credit score.
Disadvantages of credit cards
- May enable overspending: It might be a little too convenient to pay for everything with a credit card. The abstract nature of the money being spent makes it seem like you’re not spending any money at all. You should make sure to be careful of what you use your credit card for, especially if you already tend to pay bills later. If you’re worried about this, then try to only use your card in certain scenarios, like in emergencies or for big purchases.
- Interest and extra fees: If you overspend, it can be hard to pay the credit card issuer back because interest will be charged on your balance. Additionally, credit cards can charge extra fees for things like late payments, international transactions, cash advances, etc.
- Possible negative impact on credit score: While paying your monthly credit card bill on time can help you build credit, paying it late or not paying it at all can hurt your score significantly. Secondly, take care to not use up too much of your available credit (not more than 30%), because that can negatively affect your credit score. And lastly, make sure that you don’t open too many new credit cards in one period of time, as the hard inquiries they require will hurt your credit score.
- Each card has its own terms: Remember that each credit card has its own terms, its own perks, and its own downsides. Make sure you understand what extra fees and interest your card might charge you, and try to choose the best card for your lifestyle. Sometimes, reading the fine print can be tricky, so you can use a company like Credit Karma to browse your options more thoroughly and easily.
Where can credit cards be used, and where can they not?
Credit cards are used at many stores, only adding to their convenience. However, there are still some businesses that don’t take credit cards, or only take certain cards. Visa and Mastercard are accepted at almost every place that takes cards, the reason being that Visa and Mastercard have lower processing fees, so the business has to give up less of their cut of a given profit.
How do I pay off credit card debt? How do I avoid incurring credit card debt?
You can use the information from this article. The idea here would be to somehow tie this blog back to BNPL products like Neon. You will see in the article—“Transfer your balance to a 0% APR card” – instead of that, we can say something along the lines of—use an interest-free credit product like Neon. I think this would fit both the first and the second questions, so I will let you decide if keeping both questions makes sense. There could be some suggestions in this article like snowball vs avalanche method that would only fit the first question well.