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How Credit Cards Work

07/15/2020 - Responsibly Borrowing & Managing Credit, Tools for Teens, Using Credit Responsibly

WesBanco Wellness: A Series for your Financial Health

Bank Credit Card Options for that are Right for You

Welcome to WesBanco Wellness: a Series for Your Financial Health. Here we will tackle budgeting, debts, safe web practices and more to help get you into the best financial shape of your life.

This article is featured as part of WesBanco Wellness: a Series for Your Financial Health. Here we will tackle budgeting, debts, safe web practices and more to help get you into the best financial shape of your life.

Thinking about a credit card? Once you understand how to manage a credit card responsibly, they can be a great tool for getting cash back on purchases, earning rewards and building your credit score all while spending regularly.

Before you open a credit card, do your research and find out what card will benefit your lifestyle the most.

How Credit Cards Work

Credit cards provide you with a revolving credit line called a credit limit. You can draw on your credit up to the limit and then pay it back, usually with interest. That’s why credit cards are so flexible. They provide the resources you need to make a purchase, even when you don’t have cash on hand.

They are a great way to cover both daily and larger expenses — and many bank credit cards will also earn you rewards or cash back. When you manage a credit card properly, it can help you build your credit score and improve your future loan options.

Credit Card Interest Rates, Limits and Fees

All credit cards come with a credit interest rate and a limit. Some also come with annual fees or late charges. Let’s start with how your credit interest rate and limit are determined when you first open a card, which usually begins with your current credit score.

Your credit score will most likely determine your credit limit (how much you can borrow) and the interest rate on a new card. The better your credit score, the lower your rate. If this is your first credit card, you can expect your interest rate to be a bit higher until you raise your credit score.

Some cards may offer a 0% introductory credit card interest rate – make sure you know your full APR and when the intro period ends. If you have some existing debt, consider a card with balance transfers and a low interest rate that will help you repay credit card debt faster. Note:

  • Variable interest rates change from time to time, either at the discretion of the card issuer or according to a formula created by the issuer.
  • Fixed rates can change as well, but you’ll be given at least 45 days’ notice when your rates are going to change.

Your credit limit is also impacted by your current salary, other debts and your ability to repay them. Some credit card options, like secured credit cards, will determine how much you can borrow based on your ability to repay from a backup account. These are a great starter solution if you’re trying to build credit.

When it comes to credit cards, you have the choice of paying your bill in full each month or paying what you owe over time, usually with an interest charge. But you have to pay at least the minimum balance each month or you’ll face a late charge.

It’s important to understand any late fee, over limit fee or other annual fee structures before you sign up for a card. Learn more about the differences between these below, and find out about credit card grace periods so you can reduce interest costs.

Credit Card Fee Options to Think About Before Opening a Card

Understanding the terms that banks and credit cards use gives you a better idea of bank credit card benefits and drawbacks. Review each of these terms, benefits and fees with a new card before you decide it’s right for you.

  • Annual fee. A flat rate you may pay per year to use the card.
    • TIP: Many cards will waive the fee for the first year, so make sure you pay close attention and don’t get hit with a fee in year two.
  • Annual percentage rate (APR). The cost of using credit, expressed as a yearly rate. It is only charged on credit you use, and often not applied if you have a grace period and pay in full.
    • TIP: Choose a card based on APR and not just the introductory rate. Discounted credit card interest rates can help you transfer balances or manage some initial big purchases. But make sure you can manage the ongoing rate before you sign up.
  • Finance charge. This is a broad term that covers many of the different fees and charges you may encounter while using a bank credit card (including interest, annual fees, late fees or foreign transaction fees). These charges are often impacted by the amount you borrow, the term, and the APR.
    • TIP: Avoid finance charges by choosing a bank credit card without fees and by paying your bills on time.
  • Grace period. The number of days you have to pay your bill without owing a finance charge or paying interest.
    • TIP: If you do not pay your balance in full, you will lose your credit card’s grace period until you have paid two cycles in full.
  • Minimum Payment and Late payment fee. The amount you must pay by the due date and the fee you may be charged if you don’t.
  • Over limit fee. The amount you must pay if you charge more than your credit limit (if you’ve opted in to being able to charge more than your limit).

More on Credit Card Grace Periods

Many credit cards have a grace period, which usually lasts as long as you pay your balance in full. The grace period is the amount of time (by law at least 21 days) you have between the date you receive the bill and the date the payment is due. If you’ve paid your previous balance in full and on time, no credit card interest is charged on purchases you’ve made during the billing period, or the next cycle, and this continues as long as you pay in full on time.

If you do not pay in full, you will waive your credit card’s grace period and will be charged interest on your balance, as well as any new purchases until you pay back the full balance, not just your last bill. Some bank credit cards may require you to pay your balance in full for two months before they will reinstate a grace period.

Credit Card Options for Every Lifestyle

Once you get the hang of it, using a credit card is easy. But choosing one isn’t always simple.

Not all credit cards are the same. When choosing a new bank credit card, ask yourself a few questions to narrow down the options and pick one with a lower cost to you and that provides benefits and perks that will help you reach more goals:

  • Do you usually pay your credit card bills in full and on time each month?
    • If not, how long does it usually take to repay your cards?
    • How high is your balance?

This can determine how important your credit card’s interest rate will be. If you keep a lower balance and pay it off each month, you won’t have to worry as much about credit card interest rates. However, if you regularly carry a balance, you won’t have a grace period and you’ll need a card with a more manageable rate

Where will you use your card the most? Do you plan to use it while traveling?

This can help you determine which rewards option is best for you. Do your research and decide on earning cash back, travel points or points based on spending categories. If you travel regularly, you may also want to consider a credit card that waives foreign fees.

Learn More About WesBanco’s Rewards Credit Cards

Choose Between a charge card, bank credit card or retail credit card

Charge cards, like the traditional American Express Card or Discover Card, have no stated credit limit. However, you do have to pay your bill in full each month or you’ll be charged interest. Additionally, you may not be allowed to use the card again until you’ve paid your bill.

Affinity cards are cosponsored by the card issuer, such as a bank or credit union, and another company, such as an airline, car manufacturer, non-profit organization, or website. The card issuer handles the billing, while the cosponsoring company offers perks, like travel points toward airline trips.

Retail credit cards are specific to an individual store and often provide a discount or other benefits when you shop there. They have lower credit lines and don’t have annual fees, but the finance charges on unpaid balances may be higher than on other cards. Retail cards can cause issues if you wind up with too many different bills throughout the month and lose track.

Bank credit cards are traditional cards issued by local, regional, or national banks. Credit lines and interest are based on your credit history and will be impacted by your future credit usage. Fees are assessed if you do not make minimum payments and there may be other financial charges depending on the structure of the card. Some banks will offer secured credit cards to help you build credit.

More About Secured Credit Cards

If you’re turned down for a traditional credit card, consider a secured credit card. Secured bank credit cards also offer a revolving credit line, but it’s based off an initial security deposit. When you apply for a secured credit card, you also have to open an interest-bearing account, such as a savings, money market or CD with the bank that issues the card. Your credit line will be equal to the amount in this account. If you don’t make your payments on time, the bank will take the amount you owe out of your account. But if you use the card regularly and pay on time, you can build your credit and over time may become eligible for a regular bank credit card.

Explore Credit Card OptionsExplore Credit Card Options
Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

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