Purchase interest rate
American Express Cobalt Card
Apply today and earn up to 45,000 Membership Rewards points in your first year.
- Purchase interest rate: 19.99%
- Cash advance rate: 21.99%
- Annual fee: $120
- Credit rating: Fair+
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If you’ve been wondering, “How do credit cards work, anyway?” here’s a guide to get you up to speed. Once you get the hang of them, you’ll find that credit cards are incredibly helpful financial tools. Purchase interest rate Apply today and earn up to 45,000 Membership Rewards points in your first year.
American Express Cobalt Card
Purchase interest rate
Apply today and earn up to 45,000 Membership Rewards points in your first year.
A credit card is a small plastic card that lets you borrow money from a financial provider. If you borrow funds for a significant period of time, you’ll pay a fee for the privilege of borrowing — this is called interest.
Using credit cards are a secure and convenient way to pay both online and in person. They’re also excellent tools to build your credit score — a 3-digit number that represents how reliably you’re expected to pay your debt.
Beware: A credit card isn’t free money. You’re always expected to pay back whatever you borrow. There will also be a maximum limit to how much you can borrow at a time.
Here’s how they work from getting one in the first place to paying your balance and maintaining your credit score.
If you try to make a purchase that puts you over your credit limit, the transaction will usually be declined.
You can ask your card provider to allow charges over your credit limit. However, you’ll typically be penalized with a fee each time you exceed the limit.
With a credit card, you are borrowing money that you’ll pay back later. Here’s how it differs from other types of payment cards:
There’s a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are the different card types you’ll find on the market.
Rewards cards provide bonuses for your everyday spending.
A credit repair card can help you re-build your credit history or build it from scratch if you don’t have any. It is relatively easy to get. It won’t offer top-notch rewards, but it does let you build or rebuild your credit slowly.
Here are a few important terms you should know while you look for a credit card.
You’ll typically see a credit card’s interest rate expressed as an APR, short for annual percentage rate. This makes it easier to compare interest rates between cards.
Some cards offer an introductory APR. An intro APR means you’ll receive a special APR for a specified period of time, after which your APR will increase. For example, you may get a 0% intro purchase APR for 12 months, after which your APR will revert to 20%. To avoid accruing interest, pay off your balances before the 12 months are up.
A fixed interest rate stays the same for the entire time you have your credit card. A card with a variable interest rate means that your APR is typically pegged to the prime rate — this is the interest rate banks give to those they consider most creditworthy. Your provider will usually use the prime rate plus a certain percentage to determine your APR.
You may also see something called deferred interest. This is interest you won’t have to pay if you pay off a purchase within a specified period of time.
“Deferred interest” does not mean “zero interest.” If you don’t pay off your purchase in full within the specified time period, you’ll be charged interest starting from the day you swiped your card.
A credit card offers revolving credit, which you can think of like a rechargeable battery.
Here’s an example.
But this is where the magic of revolving credit comes in.
Credit cards are different from non-revolving credit sources, which don’t offer more credit after they’re paid off. Home loans and car loans are a few examples.
When you initiate a balance transfer, you move your existing credit card debt onto a new card. Any debt you move will be subject to your new card’s balance transfer APR.
Some cards come with an introductory balance transfer rate. With this intro rate, you’ll get a lower APR on your transfer for a specified amount of time, after which your APR reverts to the usual balance transfer rate. To avoid accruing interest, pay off your balances before your intro APR expires.
Balance transfers usually come with fees — typically a flat rate or a percentage of each transfer, whichever is the higher fee. Also, they might not be subject to the grace periods you get with purchases.
When you get a cash advance, you use your credit card to take out cash. For example, you might use your card at an ATM. Purchases like gambling chips, gift cards or traveler’s checks may be classified as cash advances.
It’s a good idea to avoid cash advances because they tend to attract high APRs and fees. Also, they often don’t come with grace periods for interest.
Your credit utilization ratio is the relationship between how much you owe on your credit card compared with your total credit limit.
Your credit utilization factors heavily into your credit score. It’s a good idea to keep it below 30% at all times.
A credit card is usually offered by a bank. But if that’s so, why does your card include a logo for Visa or Mastercard?
It’s because credit cards are supported by both issuers and networks.
Your issuer is the one you’ll make payments to and call if you have problems with your card. You’ll probably contact your card network more infrequently — for example, when you want to take advantage of benefits such as Visa Concierge or Mastercard roadside assistance.
Whenever you apply for credit from a lender — for a mortgage, car loan or credit card — your credit score matters. Your credit score is a numerical measurement of how trustworthy you are as a borrower. Lenders check your credit score to gauge their chances of being repaid. Here’s a simple rule of thumb: the higher your credit score, the more likely you’ll be approved for a credit card.
Here are a few important factors that affect your credit score and, in turn, your approval odds:
It’s natural to be nervous to apply for a credit card. The truth is, there are good reasons to get a card, as well as situations in which you shouldn’t get one. Here are a few arguments for both.
Owning a credit card isn’t always free. There are several costs to watch out for, from the well-advertised to the non-obvious.
With so many credit cards on the market, there’s no “perfect” card. Here are a few factors to compare to help you decide. Once you understand credit card features, you’ll be on your way to using cards responsibly.
Consider whether you’re willing to pay an annual fee for your card. If you’re not, there are plenty of no-annual-fee products to choose from.
Also, consider the things you’re likely to do with your card, and avoid the corresponding fees. For example, if you’ll use your card internationally, look for a product with no foreign transaction fees.
If you’ll initiate a balance transfer on your card, you might like a product that waives transfer fees.
Before applying for a card, check its pricing and terms. There, you’ll find the interest rates you’ll pay for various transaction types. The APR is especially important if you plan on carrying a balance from month to month.
Check if the card’s bonus rewards match with your typical spending. If you’re a foodie, for example, you might like a card that offers accelerated rewards on dining purchases.
If your supermarket bills are substantial, look for a card with the best rewards on groceries.
If you spend relatively evenly across many categories, you might like a card with flat-rate rewards.
Particularly if your card has an annual fee, there will likely be benefits you can enjoy. The best travel cards often have perks like travel credits, airport lounge access and hotel status upgrades.
It’s best to get a credit card only if you have your finances in order. If you have structural financial problems like chronic overspending, a credit card won’t help — instead, it could make things worse.
It’s easy to rack up large balances on credit cards, especially because most cards don’t require you to pay your bill in full each month. Paying the minimum each month is a particularly good way to find yourself deep in debt.
Beyond considering whether you can spend responsibly, think about how a card can help you reach your financial goals. Maybe you need to make a big purchase and pay it off over time. In that case, a 0% APR card could be a better choice. If you need to escape from high interest rates on your current card, you could apply for a balance transfer card.
Your credit history will largely determine which credit cards you’ll qualify for. The higher your credit score, the more choices you’ll have.
It will be tougher to get a credit card with fair credit, but you do have options. However, it’s unlikely that you’ll get a card that offers rewards.
If you have poor credit, most cards will be out of reach. Consider a secured credit card to rebuild your credit.
If you’re young, you probably don’t have much of a credit history. Consider starting with a student credit card or secured credit card. Both cards can help you learn how to use credit responsibly.
The older you are, the more likely you are to have a credit history. Check your credit score and apply for the cards that you have a good chance of being approved for.
Income can be a significant factor when a card provider decides whether to approve you. The reason is simple: your provider wants to know you have the ability to repay your debt. All else being equal, the higher your income, the more likely your provider is to approve you.
You don’t necessarily have to be employed to get a credit card. As long as you have some source of income, you’re eligible.
You can find a card that complements your interests. For example, if you like staying at a certain hotel chain, you can get a card that rewards you for spending money there.
You’ll also find brand-specific cards. Wherever you like to spend money, see if there’s a card offered there that fits your interests.
When you apply for a credit card, your card provider may want to verify your income. They may also ask for documents to verify your identity.
While most providers require you to apply for a credit card in your own name, some will let you apply for a joint account with a partner. If you want to give others access to your account, add them as authorized users.
We’ve assembled a few common application requirements you can expect when applying for a credit card.
It’s a great feeling when you finally get your first credit card. When you do, resolve to build good financial habits.
Keep your spending in check and pay off your balance in full each month. These are the keys to using a credit card like a pro, building your credit score and opening new financial opportunities. If you’re using a rewards card, enjoy the perks that come from your usage!
Ready to take the plunge? Compare credit cards now.
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