How Do Credit Cards Work? What You Need to Know

Maybe you're thinking of applying for your first credit card. Or perhaps you've had one for a while, but aren't sure you understand the details of how they work.

Either way, it's important to understand the benefits of credit cards and how to use them responsibly. Continue reading to learn more about the basics of applying for and using a credit card, and gain insight into some key terminology and what it means.

What is a Credit Card?

Simply put, a credit card is a way for you to borrow money as you need it, on the go. You can use a credit card to buy what you want and pay the money back later.

Credit cards are helpful for flexibility and convenience, and to better track your spending. Used responsibly, a credit card can improve your credit rating, and it may also offer benefits like automatic cash-back rewards and “points" that you can redeem for travel, hotels and more.

What's the catch? Like any money you borrow, you have to pay it back. If you pay your credit card bill in full each month, you get to use that money interest-free. If not, you have to pay interest on your credit card balances, and interest rates tend to be high compared with other ways to borrow money.¹

Where to Apply for a Credit Card

Credit cards are often issued by a bank or financial institution in partnership with a major credit card company. For instance, RVC works with Mastercard to offer credit cards you can use all over the country and the world—anywhere that accepts Mastercard.

How Credit Cards Work

When you receive a new credit card, you're essentially opening a new credit account. You can use your card for some or all of the following:

• • To make purchases online or in stores
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• • For a cash advance, which means borrowing cash from your credit card account
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• •For a balance transfer, which means moving debt from elsewhere (such as another credit card)

Credit limits

Your credit card will come with a credit limit. This is the maximum amount of money you can borrow at any time. For instance, if your credit limit is $1,000, you can only borrow up to that amount.

However, just because you can spend up to your credit limit doesn't mean you should. In fact, it's better for your credit rating not to use the maximum amount available to you.

Additionally, the more you spend, the harder it will be to pay your bill when it comes due. Before you buy something, think: Would you still want it if you knew you'd be paying it off for months (or years) on end, with interest?

Billing statements

Each month, you'll receive a billing statement that lists all your purchases for the month as well as a total balance, a minimum payment and a payment due date. If you don't pay back at least the minimum payment by the due date, you will have to pay penalties. Failing to make payments on time can also negatively affect your credit.²

(Tip: You can set up autopay between your Vivid Crest Bank account and credit card so you never miss a payment!)

Ideally, you'll pay the entire credit card balance each month, on time, to avoid paying interest. (Note: This "grace period" usually only applies to purchases; if you're taking out cash advances, you might have to pay interest on them immediately.)

If you can't pay in full, it's still a good idea to pay as much as you can, as soon as you can—even if that means making multiple payments in a month. Interest is often calculated daily, so if you can't pay your full balance right away, don't wait until the next payment due date to put more money toward your balance.³

Minimum payments

A minimum payment is the smallest amount you can pay on your credit card bill to avoid penalties, such as late fees and a higher interest rate. To avoid these penalties, you must make your minimum payment by the due date.

Your credit card issuer will calculate the minimum payment based on their own formula. Remember that if you only pay the minimum, you have to pay interest on the remaining account balance, and that money can add up. If you make only the minimum payment each month, even if you make no new purchases, you could be paying off that credit card balance for many years or even decades.⁴

Annual percentage rate (APR)

APR stands for annual percentage rate, and it's the interest rate that's charged on money you owe on your credit card.

Each credit card has its own APR; some even have different APRs for different scenarios, like purchases, cash advances and balance transfers. Your credit card statement should show the APR that applies to your account in various situations.

What is a good APR for a credit card? It varies, but if you think you'll be carrying a balance on your card, it's a good idea to aim for as low an APR as possible. Recent data suggests that the national average APR is 20.4%, so if you can get a card with a lower APR than that, you can probably consider it a good deal.⁵

READ MORE: Credit Card Terms You Need to Know

How Does a Credit Card Impact My Credit Score?

Credit scores are a measure of your creditworthiness, and they are cumulative over time. This means that responsible (or irresponsible) use of your credit card will impact your credit score, which can influence your future ability to borrow money or even rent an apartment.

Keep in mind that credit scores change over time. “High" credit scores can drop if you miss payments or maintain high balances on your cards. “Low" credit can get better if you consistently make payments on time.

If you've never borrowed money before, a credit card can be a smart way to start to develop a good credit rating. To make it count, follow these guidelines:²

• • Only use a small portion of your total credit limit.
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• • Pay every bill on time, even if you can only make the minimum payment.
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• • Keep accounts open for a long time, even if you don't use them regularly.
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• • Check your credit report regularly to ensure there are no errors.

If you have a poor credit rating and want to improve it, you might have trouble getting a credit card. In that case, a secured credit card might be right for you. These allow you to deposit funds to use for purchases. Your credit line is equal to the amount you deposit. These types of cards allow you to build and maintain your credit score, while also helping control your spending.

Apply for the RVC Premier World Mastercard® today

Ready to apply for the card that best fits your needs? With the no-fee RVC Premier World Mastercard®, the form is online, so you can apply from just about anywhere. Plus, you'll get cash back on every purchase, and plenty of other perks and benefits. All that and a better credit rating? Sounds like a great deal to us.

 

Kat Tancock loves to spend her credit card points on fun kitchen appliances.

 

READ MORE: What's the Right Number of Credit Cards?