Understanding Credit Cards
Credit cards are a powerful financial tool but only when used wisely. Whether you're just starting out with your first credit card or looking to deepen your knowledge, understanding how they work and how to use them to your advantage is key. From how credit cards function to building credit, maximizing rewards and avoiding common pitfalls, let’s break down credit cards.
1. How Credit Cards Work
At their core, credit cards are a type of short-term loan. When you use a credit card to make a purchase, the card issuer pays the merchant on your behalf. You then repay the card issuer either in full by your statement due date or over time, with possible interest.
Each card has a credit limit, which is the maximum amount you can borrow at any given time. If you pay your balance in full each month, you generally avoid paying interest. However, carrying a balance can lead to high interest charges, which is how many people fall into debt.
2. How to Use Credit Cards Wisely
The key to using credit cards beneficially lies in discipline and planning. Always aim to pay your full balance each month to avoid interest. Set up autopay or reminders to ensure you never miss a due date as late payments can hurt your credit score and cost you in fees.
Use your card for regular, budgeted expenses, such as groceries or gas, rather than unplanned splurges. Keeping your credit utilization low, ideally under 30% of your limit, can also positively affect your credit health.
3. Credit Card Rewards
One of the most attractive features of credit cards is the rewards they may offer. These can come in the form of cash back, points or airline miles. If you pay off your balance regularly, these perks are essentially free money. Just be cautious not to overspend in pursuit of rewards, which can negate any benefits.
At Heritage, we offer our members a Rewards Credit Card that allows you to earn points for every dollar spent. These points can be redeemed for cash or merchandise. Learn more here.
It's important for you to choose a rewards program that fits your lifestyle. If you travel often, a card that offers travel perks or airline miles may be best; for everyday purchases, a cash-back card might be more rewarding.
4. Credit Building
Using a credit card responsibly is one of the fastest ways to build and maintain a strong credit score. Your payment history, credit utilization and length of credit history all influence your score. By keeping your balances low and paying on time, you can build a positive credit profile that will serve you well when applying for a car loan, mortgage or even a job or apartment. Learn more about the five reasons why a credit score matters here.
5. Potential Pitfalls
While credit cards offer many benefits, there are also potential pitfalls. High-interest rates can make it easy to fall into debt if you carry a balance. Fees for late payments, cash advances or going over your limit can also add up quickly. Additionally, using too much of your credit or applying for too many cards in a short period can hurt your credit score. It’s essential to treat credit cards as a financial tool, not a source of free money.
As a not-for-profit credit union, we at Heritage work to improve lives; simplify banking with banking designed for you. Unlike most banks, one way we do this is by offering competitive rate credit cards1. We want our credit cards to serve you as a financial tool, not a potential pitfall. Learn more here.
Understanding how credit cards work and using them strategically can lead to significant financial advantages, including improved credit, valuable rewards and greater purchasing flexibility. However, it’s equally important to be aware of the potential downsides and to use your card with care. With a bit of knowledge and discipline, credit cards can be an asset, not a liability.
The views and opinions expressed in this blog are those of the writers, and do not necessarily reflect the views or positions of Heritage Federal Credit Union.
Membership restrictions apply. Subject to credit approval. Insured by NCUA.
1 Qualification is based on an assessment of individual creditworthiness and our underwriting standards. All credit union loan programs, rates, terms, and conditions are subject to change at any time without notice. Call us at (812) 253-6928 or toll free at (800) 858-1693 for current cost information.
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