Ultimately, a credit card allows you to make purchases and pay for them later. In that sense, it’s like a short-term loan.
When you use a credit card to make a purchase, you’re essentially spending the credit card company’s money. You then pay that money back to the credit card company, with or without interest, depending on the timing of your payment.
Your credit card company will assign you a credit limit that you can make purchases against. This limit will be based on things like your credit score, income, and account history. As you charge purchases to your card, your available credit shrinks. As you make payments against your balance, you free up the available credit again. This is designed to run in a cycle where you make payments on your card, then pay it back, allowing you to make future payments with your card.
Each month, you’ll receive a statement showing your account activity. This statement includes:
- Your total card balance
- Your available credit limit
- Purchases you made during that billing statement cycle
- Minimum payment due
- Payment due date
The minimum payment due is the smallest amount you have to pay for that month. But it’s always a good idea to pay more than the minimum if you can.
Your card statement will also tell you how much it will cost you to pay off the balance over time with interest. You can avoid interest charges on credit card balances by paying your bill in full during the grace period. A credit card grace period is a set time period, typically 20 to 30 days, that you have to pay off recent purchases before interest starts accruing.
Key Advantages of a Credit Card:
- Build your credit score. Using a credit card consistently for your monthly bills is a great way to increase your credit score. Just be sure to pay the bill in full and on time every time. Read this article for more ways to how to improve your credit score.
- Earn rewards for money that needs to be spent anyway. Using a credit card that offers rewards for a bill that needs to be paid anyway is a great way to frequently use your card without overspending. Redeem credit card rewards for everyday purchases with our many credit card options.
- Automated monthly payments. With a credit card, you can set up automatic payments which will help ensure your payments are always fulfilled on time. If you always seem to forget about your monthly bills and have to face the consequences of late or missed payments, this could pose a major advantage because you don’t have to think twice about it.
- Budget easily. Paying with a credit card makes for easy tracking of monthly spending. To conveniently view your statements online anytime, consider setting up eStatements. And check out this article for more information on how to build a budget.
With that said, there are factors you need to look out for when selecting and using a credit card.
- Additional Fees. Pay close attention to the payment options on every bill; some providers charge a processing fee for paying bills off with a credit card. In addition, some credit cards charge annual fees and/or balance transfer fees. Make sure to inquire about all fees before choosing a credit card, and shop around for the very best rates and reward programs. Our Low Rate Visa charges $0 annual fees and no balance transfer fees.
- TIP: Before deciding whether to pay a specific bill with a credit card, check with your provider to find out if this is a viable option and if there will be a fee attached for paying with your credit card.
- Credit Card Overuse. If your financial situation is strained, then a credit card could possibly make it much worse. For members who are already carrying a sizable amount of debt, it may not be the best idea to charge a monthly bill to a credit card. Because you are borrowing money with a credit card, you might feel inclined to spend what you don’t actually have. Avoid this, as you could end up in a worsening financial state.
- TIP: To make a credit card work, you have to plan ahead to make sure that you have enough money in your account to pay off all purchases when your credit card statement arrives. If you don’t, additional interest fees will be added, putting you further into debt. Remember, do not make purchases on a credit card if you cannot cover the expenses. Read this article for help managing debt.
- Interest. The amount of interest you pay is determined by your card’s annual percentage rate, or APR. The APR reflects the interest rate for the card, along with any fees the card charges, annualized as a percentage. Interest may accrue on the money owed that you don’t pay off on your statement. Members who cannot pay their entire credit card bill each month could be burdened with more accrued interest than they can afford. Avoid this by always paying the minimum due each month.
Credit cards can have more than one APR. For example, your card may have one APR for purchases, another for balance transfers, and still another for cash advances. Some cards also offer promotional APRs that apply to purchases and/or balance transfers for a limited period of time after you open your card account – read more about our special introductory offers on balance transfers.
Credit cards can offer incredible convenience whether it comes to paying off bills or helping contribute to building your financial goals. But as you’ve learned, it’s important to use your credit card correctly as it can leave a significant impact on your financial standing. Don’t let those factors intimidate you into not opening a credit card, but instead be aware of the possible consequences and thoroughly educate yourself before signing up. Before deciding on an credit card, consider all factors and look for the best rates and rewards.