To many Americans, credit cards are a bit of a mystery. This is a problem because mismanaging your credit can lead to serious financial issues.
Fortunately, getting a good understanding of credit is not hard.
To get you started, here are the answers to the five of the most common credit card questions.
1. Do I need a credit card?
While you do not absolutely need a credit card, there are many benefits to taking one out.
First, a credit card makes shopping much easier. Most retailers accept cards and it saves you the hassle of always carrying cash.
It’s also safer to use than a debit card because credit cards have better fraud protection. Many cards also offer generous reward programs.
Finally, a credit card helps build your credit score, which you’ll need if you want to take out a mortgage, car loan, or rent an apartment.
2. What is my credit score?
Your credit score is a number between 300 and 850 that represents your risk as a borrower. A higher credit score is better.
Three agencies (TransUnion, Experian, and Equifax) calculate your score based on factors like whether you’ve paid your bills on time, how much debt you have and how long you’ve had credit.
3. How do I pick the right card?
The right card for your situation depends on a few factors.
First, you need to consider your credit score. If you have a good score, 750 or higher, you should be able to qualify for most cards. If your score is lower, you’ll need to ask credit card companies which options you have available.
From there, you should consider the program details of each card. Are you looking for a certain kind of reward like air miles? This helps narrow your search.
You should also consider a card’s interest rates and fees. Ideally these should be as low as possible.
4. What happens if I can’t pay my bill?
Since a credit card lends money, you don’t have to pay off the entire balance at once. If you keep a balance on your card, the credit card will charge interest on whatever you haven’t paid. The interest rate is your card’s APR.
While you don’t have to pay off your entire balance each month, you need to make at least a minimum payment. If you don’t, the credit card company could charge you an extra penalty fee — missing payments also hurt your credit score.
5. Should I close an old card?
Probably not. Part of your credit score is based on the age of your credit accounts. An old credit card helps you in this category.
If you close an old account, it will damage this part of your credit score because it effectively erases all your (hopefully) good credit history on that card. Instead, keep the card in a safe place and use it maybe once or twice a year to keep the account open.
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Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.