Credit Cards FAQ
Frequently Asked Questions about Credit Cards
- Why do I need a credit card?
- How do I decide which credit card is right for me?
- How do I know if I have excellent, good, average or bad credit?
- What is an APR?
- What is a credit score?
- What is a grace period?
- Can I get a credit card that will give me airline miles?
- What other rewards are available?
- Do I have to pay an annual fee?
- Will I be approved for a credit card?
- Are some card-issuing banks better than others?
- How many credit cards do I need?
- What happens if I do not pay my bill on time?
- Does applying for credit cards hurt my credit?
- Should I close credit cards that I do not use?
- Is it a good idea to transfer my balance to new credit card?
- Will I be held responsible if someone makes charges on my credit card without my permission?
- What is a secured credit card?
- What is a prepaid debit card?
- How did NextAdvisor review these credit cards?
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While a credit card may have risks or downsides, these are vastly outweighed by its benefits. The primary purpose of a credit card is to provide you with credit. This means that you can buy something today, but not have to pay for it until later, thus borrowing money from the credit card issuer. One of the best aspects of most credit cards is that if you pay your bills on time and in full, you are able to borrow this money with no interest, effectively receiving a free loan. You only have to pay interest if you do not pay your bill in full by the due date. In this case, you do have to pay interest, and often at a fairly high interest rate, although this may often be the cheapest and/or the only way for many people to borrow money. Current interest rates, or APRs, on credit cards are anywhere from around 10% to over 20%, although they can be as low as 0% for promotional periods.
In addition to borrowing, there are many other reasons why having a credit card is valuable. It is important to establish a credit history, since in many cases, having no credit can be as detrimental as having bad credit. Even if you do not use your credit card often, it can be crucial in certain situations, such as emergencies, when making hotel or restaurant reservations, or when shopping online. A credit card is more secure than a debit card, since you can dispute charges before paying them.
There are many factors you should consider when choosing a credit card. When considering a credit card offer, you should take into account the card's features, such as the APR, the length of the grace period, the credit limit, annual fees, cash advance fees, balance transfer fees, late fees, fees for having a balance above your credit limit, any other fees, and whether the card offers any rewards. You should also consider your own financial situation. What is your credit history like? How much are you likely to charge to credit each month? Are you able to pay your credit card bill in full, or do you carry a balance? Do you have existing credit card debt or other significant debt?
These are all good questions to ask yourself when choosing a credit card and your answers to these questions should determine which card is right for you. For example, if you know you will need to carry a balance on your credit card (not pay it off completely each month) for the foreseeable future, then you will want to find a card with a low ongoing APR. If you are looking to make a large, one-time purchase in the short-term and pay it off over 6 months to a year, then finding the lowest introductory APR card would be a wise move. If you always pay your bill on time and in full, then a rewards program may be most important to you.
If you know your credit score, see our information on credit scores. If you don't know your credit score, we recommend getting a free credit score at one of our recommended free credit score providers. Your credit score is the best way to understand which type of card you will likely be approved for. However, if you don't have that information, you can estimate your credit score based on guidelines from the credit card companies. For example, Capital One gives the following guidelines:
- I have had a loan or credit card for at least five years
- I have a credit card with a credit limit greater than $10,000
- I have never been more than 60 days late on a credit card, medical bill or loan payment
- I have never declared bankruptcy
- I have had a loan or credit card for three years or more
- I have had a credit card with a credit limit above $5,000
- I have not been more than 60 days late on any credit card, medical bill, or loan in the last year
- I currently have or have had a U.S. loan or credit card
- My credit limit on a current credit card, if any, is less than $5,000
- I may have been late on more than one credit card, medical bill, or loan payment in the last six months
Of course, these guidelines are an oversimplification and every credit card issuer has different formulas to determine your creditworthiness. They are helpful as general guidelines, though.
Your APR, or annual percentage rate, is the yearly interest rate you will pay if you carry a balance on your credit card. This also applies if you transfer your balance from another card or take out a cash advance. One credit card may have a few different APRs. There may be one percentage rate for purchases, a different rate for balance transfers, and another for cash advances. The annual percentage rates for balance transfers and cash advances are often higher than the APR for purchases.
Your APR can change over time. If you have a "fixed rate" APR, it will change less frequently, and the credit card company must notify you before it increases. If you have a "variable rate" credit card, the APR will change from time to time, usually depending on the prime rate or the Treasury Bill rate. Also, many credit card offers advertise an introductory APR, or they may even offer no interest whatsoever for the first few months. Keep in mind that this introductory APR will generally go up after the introductory rate expires. Those consumers with excellent credit can typically qualify for the lowest APR.
Companies have built formulas to turn the information in your credit report into a number that represents how good of a credit risk you are. These numbers are called credit scores. Most credit scoring systems use the same numerical range which is between 300 and 850. A higher score indicates a stronger credit history and is more likely to be looked upon favorably by potential lenders.
Credit scores are an extremely important part of how lenders evaluate the likelihood that you will pay back your loan on time, but they also use other information when deciding whether to grant you credit and how much to grant you. While different creditors will evaluate scores differently and there are no hard and fast rules, some general guidelines for what scores mean are shown below. Keep in mind that other factors will also affect the type of credit you might be eligible for.
- Over 750: Excellent - you should be eligible for any type of credit you want at the best rates
- 720-750: Very good/Excellent - eligible for almost any type of credit and usually will get the best rates
- 660-720: Average/Very Good - you will be able to get most types of credit but will often not get the best rates or products
- 620-660: Below Average/Average - you will still be able to get credit in a lot of cases but will have to pay higher interest rates than others
- Below 620: Bad Credit - you will have difficulty obtaining credit and when you get it your rates will be high
Unfortunately, it is not as simple as each person having one credit score. Since the scores are calculated based on the information in your credit report and you have three different credit reports (one from each of the 3 credit bureaus), you know that you will have three different credit scores. Furthermore, there are a lot of different formulas to calculate credit scores. FICO is the most widely used formula but each of the credit bureaus also has their own formula, as do countless other companies. Many lenders with whom you have a relationship calculate a custom score based on the additional information they have about you outside of what is in your credit report. So for each different credit score formula, you will have 3 different credit scores. And since there are many different formulas, that means you will have lots of different credit scores. The credit scores you receive from the credit monitoring services we recommend at NextAdvisor.com are either FICO scores or the credit bureaus' scoring system; we tell you which one in our description of the service. In general, it is best to get your FICO score because that is the most common score that lenders use. However, the other types of scores are typically very similar to the FICO score. Also keep in mind that just as your credit report gets new information all the time, the credit scoring formulas are using that new information to recalculate your score, so your score changes over time.
Your grace period is the amount of time you have to pay your balance in full before a finance charge is added. Longer grace periods are preferable, because they give you more time to pay for your purchases before being charged interest.
There are many credit cards that allow you to earn frequent flyer miles when you charge purchases to your card. These credit cards tend to charge annual fees and often impose slightly higher interest rates. If you travel frequently or spend a fairly significant amount of money using your credit card, then a card that rewards you with airline miles may benefit you greatly. If you only use your credit card occasionally, or for less expensive purchases, it will take you a very long time to accumulate enough miles for even a cheap domestic flight. In this case, you would most likely be better off with a different type of rewards card, or a card that does not offer rewards but charges a lower APR and no annual fee.
In addition to credit cards that reward purchases with airline miles, there are many cards that offer cash back or a variety of other awards. With a cash back rewards card, you receive a percentage of your charges back in either a check or money taken off your next month's bill. Another type of rewards card lets you earn "points" which can be redeemed for various items. Some rewards cards offer discounts at certain hotels, restaurants, stores, or gas stations. These types of rewards cards also tend to charge annual fees and higher interest rates.
Some credit cards charge an annual fee, or membership fee, for the privilege of using or carrying the card. This fee applies regardless of whether or not you use the card at all. Fees range from around $25 a year to over $100. Rewards cards typically charge an annual fee. There are many credit cards available that do not charge an annual fee. If you have a high credit score, you are more likely to qualify for a credit card that does not charge an annual fee.
If you have been responsible with your use of credit in the past, you should be able to get approved for a credit card. If you have bad credit or no credit, it will be more difficult to qualify for a credit card. You may still be able to get a credit card, but you will probably have to pay higher fees and a higher APR, and your credit limit will be lower. As you work to pay off debt, pay your bills on time, and establish good credit, you will become a more appealing candidate for better credit card offers.
Which card-issuing bank is ideal for you depends on your specific credit needs. There is no single credit card for everyone, and the issuing bank is less important than the terms of the card offer. Each credit card has different terms, regardless of the card-issuing bank, so focus on whether the terms are appropriate to your financial situation and credit needs.
This is different for every person, but you should avoid obtaining more credit than you need, or can feasibly pay off. If you obtain too much credit, you risk overextending yourself. Some people have multiple credit cards in order to split their household and work expenses. Others obtain multiple credit cards because they would like a higher credit limit, better rewards, or better terms. Keep in mind that at a certain point, having too much credit will make it more difficult to obtain credit in the future.
If you pay only the minimum required amount on time, the remaining balance plus interest will carry over onto your next credit card bill, and there will be no negative impact on your credit score. If you do not pay the minimum by the due date, however, you will be charged a late fee and your card-issuer may raise your interest rate. Late payments also have a negative impact on your credit score.
Every time you apply for a credit, a credit inquiry will appear on your credit report. Multiple credit inquiries are considered a sign of increased risk, and can lower your score slightly. The more information your credit report contains, the less impact credit inquiries will have on your credit score. If you have a short credit history, inquiries could lower your score by a few points. It is best to do as much research as possible to determine which credit card offers are best for your financial situation before actually applying. However, FICO does take comparison shopping into account when calculating your credit score, and for that reason, if you have multiple credit inquiries within a 30 day period, they will only be counted as a single inquiry.
It seems logical to close a line of credit that you no longer intend to use. Unused accounts could be targeted by identity thieves, or they could be charging you unnecessary fees. But closing unused credit accounts may actually hurt your credit score. Since creditors prefer to see a longer credit history, closing old accounts could lower your credit score by causing your credit history to appear shorter. Your credit score also takes into account the percentage of available credit that you are utilizing. Creditors view you as less risky if you are using only a small percentage of your available credit. Closing accounts will reduce your overall amount of available credit, thus increasing your credit utilization, which may reduce your credit score. Closing several accounts at once could also reflect negatively on your credit report.
If you are carrying a balance on a credit card with a high APR, you may wish to consider transferring that balance to a new credit card with a lower APR. If you wish to do this, you should look for a credit card that does not charge a balance transfer fee. You should also keep in mind that the new, lower APR is generally only an introductory rate. Look for a credit card that maintains the introductory rate for the longest amount of time possible.
Credit card companies will not hold you responsible if you are the victim of fraud or identity theft and someone makes unauthorized charges on your credit card. It is important to familiarize yourself with the specific fraud liability policies and procedures of your credit card company as it can be difficult and time consuming to to prove a charge was fraudulent. If you are concerned about the risk of identity theft, you may want to review our identity theft protection service provider reviews and comparison.
Secured credit cards require the user to provide a cash collateral deposit which becomes the line of credit for that account. The amount of the cash collateral is your credit limit, so if you put down $250, you will have a line of credit of up to $250.
If you don't qualify for an unsecured credit card due to a limited credit history or credit issues, a secured credit card can be a smart choice. The advantage of secured credit cards is that some of them report your payment history to the 3 credit bureaus, thereby allowing you to rebuild your credit history. Additionally, if you maintain a positive payment history on the card, it is likely the company will eventually qualify you for an unsecured credit card.
A prepaid debit card is different from a credit card in that it is funded by your own deposits - no credit is extended. That means you have a pre-funded credit line equal to the amount on deposit with the card company, so if you deposit $500 on the card you can only spend $500. Essentially, you are providing yourself with your own credit and not borrowing from anyone.
Prepaid debit cards are easy to apply for and don't require a credit check. They can be used anywhere Visa and Mastercard are accepted to shop online, pay for bills or make over the counter purchases. The downside is because it isn't a credit card, these type of cards won't help your credit history by reporting you payments to the credit bureaus.
We thoroughly researched all the credit card offers in this category, comparing interest rates, features and any rewards programs they might offer. We also looked at annual fees, late fees and whether you need to pay off your balance each month. After weighing the data we created our credit card ranking.
After our initial evaluation, we continue to monitor the credit cards and update our reviews as situations change. We also constantly monitor the providers' sites for any service changes or specials.
We only include providers on our site that we believe offer a good value proposition. If there is a provider you know of that is not on our site, you can be fairly certain we did not rate that provider highly enough to include in our comparison. If you think we are missing a quality provider or have any other suggestions or comments, please visit our contact us page.
Advertiser Disclosure: NextAdvisor.com is a consumer information site that offers free, independent reviews and ratings of online services. We receive advertising revenue from most but not all of the companies whose products and services we review. For credit cards, we review cards from all of the top 10 US issuers by purchase volume (according to Issue 1035 of The Nilson Report, Feb 2014) excluding issuers that require additional accounts to be a cardholder or private label issuers. We may also review cards from other issuers in select cases. We are independently owned and operated and all opinions expressed on this site are our own.